Political uncertainty dominated the news cycle this month with major developments out of the US, the middle east, the UK, and China to name a few. Despite the noise present in equity markets, their advance continued.
Source: *Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index – Based on end-of-day data for the Total Return Index as at 30 September 2019
The largest story of the month in the US was that the Democrats announced the initiation of an impeachment inquiry into President Trump. The inquiry was opened due to allegations that President Trump pressured the president of the Ukraine to investigate political opponent former Vice President Biden. Despite the shocking headline, US equities declined modestly on the news by approximately 1% that week. Although this news adds political uncertainty to markets, corporate profitability and economic fundamentals are more important long-term than any short-term scandals.
The Federal reserve cut interest rates for a second time this year with the announcement of a 25-basis point reduction in its benchmark interest rate. In addition to the rate cut, the Fed also provided some much-needed stimulus to the “repo market” by injecting cash into the banking sector for the first time since the financial crisis. The repo market is a market in which borrowers seek short-term loans (can be as short a duration as overnight); borrowers are then matched with lenders that have the liquidity to enter into these transactions and are backed by T-bills. We will continue to monitor developments in the money markets as they are crucial to the health of the economy.
Despite the non-stop news cycle in the US and its present risks, fundamentals are still positive, and the US is in a position where they can continue to grow albeit at a slower pace than in the previous decade.
Back home, the Bank of Canada kept interest rates steady and have not started a regime of rate cuts like we’ve seen with other central banks; the economy is in a strong enough position to support itself without the monetary stimulus. There have, however, been signs of a slowdown in growth more recently that is mainly attributable to lower gas and oil extraction. Therefore, we could still see the Bank of Canada step in and lower rates in future announcements to help stimulate the economy.
Canada’s stock market has performed very well year-to-date with gains over 15%. As a Canadian investor, it’s important to diversify your portfolio across many regions as the Canadian market is very concentrated and represents only approximately 3% of the global stock market.
The largest story mid-month came out of Saudi Arabia when an oil facility was attacked. The price of oil surged 15% following the news as there were fears that this would affect global supply. The prices did however return to normal levels once it was determined that production will be back on its normal pace very soon. The attack was blamed on Iran and this only heightens geopolitical tensions and adds uncertainty to the region.
The UK is now a month out from the Brexit deadline, and the picture is still very uncertain as possible outcomes include a no deal exit, an exit with a deal, or another extension. The uncertainty is not good for trade in Europe nor business confidence in the UK. One thing to note is that the UK only accounts for 3% of global GDP, so although a potential slowdown of their economy is not good news, it can be managed and it’s important not to overreact to.
On the trade front there have been slight de-escalations throughout September with China announcing that they would exempt some US products from tariffs, and the US responded by delaying the next round of tariffs. All eyes will be on a meeting next month between high level trade officials on both parties in China. In our view, we’re still a bit away from a deal being reached. But if Trump wishes to seek re-election in 2020, the resolution of this issue will be integral to the campaign; we do think a deal can be reached which would serve as a major catalyst to extend the run of global growth.
If you have been following markets over the past few days you will have noticed large single day declines globally across Europe, Asia, and North America. This has been in response to the release of new economic data that suggests that US manufacturing is being hit harder than expected by the ongoing trade war and this comes combined with all of the other uncertainties present such as protests in Hong Kong, impeachment inquiries and Brexit.
What does this mean for you? Not much if you’re a long-time investor. Risks certainly exist in the marketplace today; with events such as Brexit and protectionist policy such as tariff wars, we’ve seen inverted yield curves and are currently a decade into an expansion. These themes in our view will continue to cause volatility in the markets.
Corporate fundamentals in the US and labour market data are still strong. Central bankers are accommodative. Although we may be in for a bumpy ride, we should not exit the markets or cease contributions to them. Instead, contributing regularly (made simple through pre-authorized contributions) to a portfolio that matches your goal and time horizon to an appropriate mix of stocks and bonds will help you reach your financial goals and automate decision making in order to take emotions out of the equation.