November Month in Review
Traditionally November and December are not the best performing months in the stock markets. In December markets can be depressed by tax loss selling to offset realized capital gains. January tends to outperform, due in a large extent to investment professionals investing more money into the markets. That being said, November has not been a very bad month. U.S. S&P 500 returned over 2% while S&P/TSX was flat. We see a slight retraction in the European market this month.
Over the third quarter, the Canadian economy grew 1.7% which was right in line with RBC Economics expectations and confirmed a moderation of growth that had been widely communicated and expected from the Bank of Canada.
Global Reflation and Increase in Business Spending
While inflation have been elusive in developed economies, we are seeing a strong pick up recently in core inflation and expect the coming quarters to deliver a rise in global CPI inflation toward 2.5% alongside a material move higher in developed market wage gains.
Animal spirits are stirring. Business and consumer confidence have jumped since mid-2016 and are back to pre-financial crisis levels. Together with the rebound in profits, the rise in business confidence has revived capital spending. The mix of rising household confidence, strong labor markets, and wealth increases has delivered solid consumer spending gains despite some loss in purchasing power from the rise in CPI inflation.
Global Confidence
The pickup in business capital spending reflects a strong upturn in the fundamentals. What has been missing was a strong pick up on capital spending by businesses. This measure is closely related to business sentiment and confidence in the current business cycle. A recovery in business spending is in line with what we have observed in the uptick in business and consumer confidence.
Political Uncertainties and Market Performance
On December 1st, markets were impacted by advancements in Robert Mullers’s investigation into Trump administration’s connection with Russia during the presidential campaign. S&P 500 was down by 1% on the news and regained some of the loss later in the day. During the Watergate scandal that lead up to Nixon’s resignation, S&P 500 fell 14% within a month under similar circumstances and the loss accelerated from January 1973 to August 1974. However, during that time, the economy was already in recession. Along with the political uncertainty, the economy was also struggling with rampant inflation and oil shock.
The S&P 500 fell nearly 20% in the weeks leading up President Clinton’s impeachment. That was in the late 1990s when the stock market and economy was booming. Investors quickly concluded that the temporary political instability was not going to lead to a recession, so the market recovered the entire decline and set a new all-time high.
While political uncertainties will cause volatility in the market in the short term, the focus will need to be on the underlying economic fundamentals. Political events do not dictate market performance over the long term, it is what happens after the dust settles that set market performance. The long term impact on valuations and corporate profitability will be what we focus on to make future investment decisions.
Rita Li, CFA, MBA, CFP
Rita is a seasoned investment professional with experience working with different asset classes at top investment firms in Canada and abroad. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP®. She works with a multi-disciplined team to provide comprehensive wealth management services to High Net Worth families.