What moved the markets in February: The release of the 2018 Federal Budget dominated Canadian headlines towards the end of the month. In the U.S., new Federal Reserve Chair Jerome Powell emphasized the emergence of positive economic data following a brief equity market correction and the sudden return of volatility.
Market highlights:
Equity markets were negative in North America with the TSX down -3.0% and the S&P 500 down -3.7% for the month
The 2018 Canadian Federal Budget revealed only minor changes to the projected deficit and maintained the forecast for an average annual deficit in excess of $15 billion over the next six years. The budget drew heavy criticism for the decision to abstain from returning to a balanced budget while the economy is operating close to capacity, and for failing to address Canadian competitiveness while foreign direct investment in Canada is at its lowest level since the global financial crisis
Unemployment increased by 0.1% to 5.9%, but still remains among the lowest level of unemployment in over four decades
NAFTA negotiations resumed on February 25th in Mexico City, and are scheduled to run until March 5th. Negotiators have reportedly completed the first official chapter of the agreement, which pertains to regulatory best practices, but the most contentious issues remain outstanding, including rules of origin for auto manufacturing and the inclusion of a “sunset” clause that would require all three member nations to agree to extend the agreement after five years
Corrections in the equity market in early February were accompanied by the biggest single day surge in the VIX, an index that reflects the market estimate of future volatility. This caused exchange-traded products designed to short the VIX index to incur substantial losses. Several financial services firms liquidated their inverse VIX funds, which fell from a combined value of $3 billion to just $150 million in a single day
What to expect going forward: The daily news is full of market-changing events that sometimes affect the market for short periods, but it is very difficult to translate these singular bits of news into something more meaningful when it comes to the longer-term trend of the market. It is almost like the market doesn’t care or has already anticipated and reacted to the news headlines before they happen. Or, it could be that the short-term news really doesn’t carry as much meaning to stock prices as one would believe. The overall trend as I see it is driven by the long-term trend of earnings over a period of quarters and years, while the near-term movement is more related to the emotional state of investors, which can change quickly. It is important that investors realize the difference between the short-term reactions in stocks and the markets, and how that may differ from the longer-term trends that more accurately guide us in our investment strategies.