2019 Q4 Commentary

Jon Mitchell, Portfolio Manager

Overview

What a difference a year makes.

The week of the Christmas holidays this past year was polar opposite to 2018. We recall December 2018, when most equity markets fell 10%­15% during the month before finally bottoming out mercifully on Christmas Eve in a shortened trading day. This year, it seemed like clear sailing for much of the month and quarter, as the equity markets tacked on a final 3% in Canada to 10% in U.S. technology for an exclamation point to end the year. It was the second-best equity market for both the U.S. and Canada in the past 20 years. How do you explain such a strong finish to the year? My take is that a lot of boxes were checked in the last 90 days.

El U.S.-China phase one trade agreement. Signed in Washington on January 15, 2020, it lays the groundwork for a more extensive phase two deal. However, the second trade agreement will likely be much more difficult to negotiate.

El Brexit — Boris Johnson won a resounding majority. The Conservative government in the UK is set to proceed with a modified stage one withdrawal agreement.

The Federal Reserve made its third interest rate cut on October 30 and remains accommodative. Since the end of July, the Federal

Reserve has injected $300 billion into the U.S. banking system, or 40% of the $671 billion they had withdrawn since they started reducing their balance sheet in September 2017.

El Robust U:S. employment growth and strong consumer spending into the year end.

El Prevailing sentiment around FOMO (fear of missing out) and TINA (there is no alternative) drove the major large-cap companies up significantly in Q4.

Some of the other issues we have been following provided some recent news as well, including:

Construction is beginning on the government-owned Trans Mountain Pipeline, while TC Energy's Keystone XL pipeline looks to start U.S. construction this quarter. Pipeline stocks finished 2019 with an outstanding 34% return for the year.

There is a glimmer of light in the Canadian oil and gas sector, as Alberta reduced oil curtailments, cancelled crude by rail contract and introduced drilling incentives. Canada also recently added the most drilling rigs since January 2015, according to data from Baker Hughes Inc. Exploration stocks had a strong Q4, with a gain of 12.9% (more than the 10% made in all of 2019).

The United States-Mexico-Canada Agreement (USMCA) trade deal passed in U.S. Congress, and is scheduled to be voted on by the U.S. Senate before the impeachment trial begins.

There are modest expectations for interest rates in 2020, given that it is an election year in the U.S. The market is pricing for one cut in Canada and between one to two cuts in the U.S. this year. This appears to be at odds with possible inflation sources, including wage growth demands, given the 3.6% U.S. unemployment rate.

Negative-yielding bonds declined to $12 trillion (USD) from $17 trillion (USD), which is still a startling figure, with no real path for most central banks to raise interest rates back to post-financial-crisis levels.

Gold and silver eked out more modest returns in Q4, with returns of 1.4% and 3.2%, respectively. Gold's 13% return for 2019 and 8.5% annual return over the past three years is noteworthy, as the three-year return would have bested nearly every equity market in the world, save for the U.S., of course. Gold spiked to $1,600 (USD) per ounce the night that Iran launched their missile strike against two U.S. army bases in Iraq.

It looks like it is a three-way race for the Democratic nomination, between Joe Biden, Bernie Sanders and Elizabeth Warren. I am not convinced that the market is pricing for a win by either of the latter two nominees at this point.

Despite a 25% rise in U.S. equities in 2019, the flow of new investment funds was funnelled into fixed income and short-term liquid investments. This is being done with U.S. 10-year bonds at 1.8%, and cash returns at about 1.6%.

2019 will go down as an "annus horribilis" for fledgling Canadian cannabis companies, as the hype surrounding the October 20, 2018 legalization ended with significant losses in many cannabis stocks over the course of the year.

I nailed the Best Actress nominees for the 2020 Academy Awards, and expect Renee Zellweger to hoist the Oscar on February 24.

On a more serious note, 2019 was a tough year for a lot of my clients' families, as five of our clients passed away. It was a difficult year for our team, as several of us lost family members this year as well. This has highlighted the need to ensure that clients have their affairs in order and to remind them that we have resources within our organization to assist them with these important matters.

Despite all of the checked boxes and progress, markets remain highly elevated on a number of metrics, including price-to-earnings, sales, cash flow and book value. Record low interest rates persist and are highly correlated to the record level of debt that has been amassed by governments and corporations over the past 10 years. My expectations for 2020 are more muted returns, but I am cautiously optimistic that some sectors and assets will continue to perform well.