To my clients:
First, a reminder that I will be away from the office next week. I will do my best to monitor developments from afar, but I expect my connectivity will be limited. I’ll touch base with Brenda as appropriate. Any urgent requests during my absence should be directed to Brenda. There will be no update next week. Next update November 22, 2019.
Also, there have been a handful of new posts under the “Our Curated Library” tab at my site that I think clients may find interesting. Here is the direct link.
It was an up week for North American stock markets with the Canadian TSX finishing up 1.7%; the U.S. Dow Jones Index finishing up 1.2%; and the U.S. S&P 500 finishing up 0.9%.
No, it’s not a ‘fait accompli’ – in fact, far from it – but, as I’ve long asserted, U.S./China trade negotiations continue to trend in the right direction. This week, reports have emerged from both the Chinese and U.S. negotiators that, upon the successful completion and signing of the Phase 1 deal announced a few weeks ago, tariff “rollbacks” may be the next “de-escalation” put into effect. Yesterday it appeared that these rollbacks were already agreed to. Today, trade advisor Peter Navarro, as well as President Trump himself, both said a final agreement on rollbacks had yet to be reached. Should rollbacks actually occur, I’d suggest that this development would be the most material de-escalation to date. Viewed another way, it could well be considered progress. To reiterate, as I have for a full year now, both sides are motivated to get a deal done. Will the eventual deal be all encompassing? Probably not. Will it be a more material outcome than the previously announced Phase 1 deal and the discussed rollbacks? Yes, I believe so. And, despite my personal distaste for the man, credit where credit is due – should the U.S. achieve material concessions from China as a result of this trade war, it would be a significant accomplishment for Trump and a win for the U.S., which indeed was/is disadvantaged under the previous/current trade framework. I can’t envision another President (Republican or Democrat) who would have had the temerity to even attempt such a gambit.
Moving on to economic data, the ISM Non-Manufacturing Index (aka “Services”) was released earlier this week and, at a reading of 54.7, it materially exceeded last month’s reading of 52.6, as well as the consensus estimate of economists at 53.5. Combined with a modestly firming firming (although, admittedly, still contracting) ISM Manufacturing Index (see last week's blog post for more), a continued strong labour market (with, itself, a significantly better than expected reading last week), and a now more solidly positive yield curve, it looks possible that economic data may have troughed in the late Summer/early Autumn. I and RBC have long held that the most likely economic path for 2019 was one of slowdown, but our base case was not recessionary. To be sure, I cannot assert - as I have in previous years – that there is no credible or imminent threat of recession. It’s absolutely the case that risks have risen in 2019. But we may be on the cusp of a demonstrable improvement in data going forward. Time will tell and vigilance will be required.
In sum, I believe portfolios are appropriately positioned at present. Specifically, clients are very close to the long-term equity target identified in their own unique Investment Policy Statements. Stated differently, clients are neither materially overweight or underweight these targets. For the last handful of years prior to 2019 clients have been materially overweight equities. Should economic data continue to improve, it is possible I may begin adding back some of the equity reductions effected this past year. Of course, owing to any number of well-known global concerns (China/U.S. trade, Brexit, Hong Kong, the Middle East, a too slow to react U.S. Federal Reserve, Impeachment etc.) it remains entirely possible that conditions could worsen further. In other words, while the base case remains reasonably constructive, perhaps bordering upon cautiously optimistic, further data confirmation is required before portfolio shifts will be enacted.
That’s it for this week. All the best. Next update November 22nd.
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
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