February Market Update

June 01, 2017 | Rita Li


Share

February in review

 

As the end of February 28, the U.S. S&P500 returned 3.72% and the Canadian S&P/TSX composite returned 0.09%.  Historically in the first year of a four year U.S. presidential cycle, the market is usually strong into the summer. Oil (WTI spot/bbl.) is up 1.3% trading at $54USD/bbl. U.S. dollar index advanced 1.6% and appreciated 0.6% against Canadian loonie.  Global stock markets have finished a largely upbeat month on a mixed note as risk appetite remains timid as a result of policy uncertainties.  

 

Fed interest rate decision back in the spotlight

 

After much deliberation and anticipation, will the March 14-15 meeting deliver the first interest rate hike in 2017? Currently the forward market have priced in a 50% likelihood for an interest rate hike in March as the end of February. 

 

How fast will the rates rise?

 

The overall credit condition remains extremely accommodative

 

Citing our U.S. strategist, every U.S. recession but two in the past 100 years has been preceded by the arrival of “tight money.” It will be two years or more before credit tightens enough to make a U.S. recession inevitable. Before then, we believe the equities markets will outperform other asset classes.

 

Is the U.S. economy ready to cope with more interest rises?

There are some bright spots:

  • U.S. unemployment rate is at 4.6% with unemployment claims at all-time low. We are starting to observe wage inflation as the labor market tightens further
  • PMI manufacturing index shows manufacturing in expansionary territory both in Developed and Emerging markets
  • 90% of the S&P 500 companies have reported earnings and are on track to deliver 4% growth in revenue and 7% in earnings

…And what keeps us up at night? A word on tariff and policy uncertainties:

 

Much ink has been spilt on Trump’s foreign policies.  It’s worth noting that historically trade protectionism and tariffs have been detrimental to economic activities.  The Tariff Act of 1930 saw U.S. GNP declined 33% (1929-1933) and a rise in unemployment rate which was the opposite of what the policymakers tried to achieve. 

 

U.S. imports decreased 66% from $4.4billion (1929) to $1.5billion (1933) and exports decreased 61% from $5.4billion to $2.1 billion.  Even Canada retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada. 

 

The Trump administration has been very active in issuing executive orders that could spell significant changes to the business fundamentals to which we have grown accustomed to.  I will dive deeper into some of the policy issues in the following month as issues become clearer.

 

References:

Interest rate graph:  Federal Reserve, FT.com

Reporting companies' earnings data: RBC Capital Markets, Thomason Financial, FactSet, S&P and Computstat

Historical Import/Export data: “Smoot-Hawley Tariff” U.S. Department of State, June 21, 2003.

 

Categories

Investing