May has proven to be an informative month. The reemergence of concerns that politics will interfere with the President’s pro-business agenda – this time following James Comey’s termination – caused a sharp, 4% drop in equity markets. In a similar pattern to February, the sell-off was more than erased within a matter of days. The implications are that: 1) equity markets have priced in little upside from US tax and regulatory reform; 2) the cause for rising equity markets to-date has been related to other factors; and/or, 3) that equity markets are blindly ignoring most risks. Given the positive economic and earnings data that continues to be reported globally, to us the odds appear to meaningfully be in favour of 1 & 2.

Curiously, what was not erased was a drop in USD. The dollar has steadily declined 3% against all major currencies since the Comey news emerged. I struggle to put forth a compelling thesis for why this has occurred, particularly given that the Fed has since reiterated that a June rate increase is likely. The currency move has neutralized about 1% of local currency gains month-to-date in most of our equity portfolios.

Domestically, Canadian bank equities are exhibiting an ever-so-gradual price decline. This past week’s decline followed somewhat mixed Q2 earnings results from the group, but the true investment theme is growing debate on whether the Toronto-area housing market has finally started to rollover. New listings are up in May while sales are down…a seasonally unusual combination that has come immediately after the new Ontario housing rules and Home Capital’s quasi-failure. It is very short-term data and could easily be a statistical blip, but it is influencing the valuation of Canadian bank stocks and merits monitoring.