Markets cheer Trump comments
Traders remained fixed on political developments in Washington this week as the words and tweets of U.S. President Trump continue to move markets. The latest came Thursday when Trump said he would advance campaign promises to lower taxes, fund infrastructure upgrades and reduce regulations. Markets cheered the news in anticipation of higher corporate profits and stronger economic growth. Risk-on sentiment got a further boost from U.S. corporate profits which are on pace to beat expectations. With about 70% of S&P 500 companies having reported results, fourth-quarter earnings are on track to have climbed 8.5% which would be the best showing since Q3 2014. Turning to Europe, ECB President Mario Draghi said Monday it was too early to turn the tap off the bank’s stimulus measures even though there are signs of strength in the euro zone economy. In the U.K., the government’s plan to exit the EU cleared the second of three hurdles Wednesday as the British Parliament’s lower house authorized a bill to start the divorce process. The next step, a vote by the unelected upper house, is expected to pass easily putting the U.K. on a path to start Brexit by March-end. Elsewhere, it’s déjà vu all over again in Greece as the International Monetary Fund warned Tuesday that the country once again risks an exit from the euro zone amid stalled bailout talks. The IMF said Athens and its European creditors must agree on deeper economic overhauls and greater debt relief before the fund contributes any more money. Without the IMF’s continued financial support, Germany has said it will stop to fund the bailout. Looking ahead, Canadian Prime Minister Trudeau meets U.S. President Donald Trump next week for the first time since the presidential election with trade and pipelines the most likely agenda items.
U.S. stocks set record highs
Three main U.S. indexes closed at all-time highs Thursday with the Nasdaq capturing its third record close in as many days. For the four days covered in this report, the Dow added 101 pts. to end at 20,172, the S&P 500 gained 6 pts. to finish at 2,307 and the Nasdaq rose 49 pts. to settle at 5,715. The TSX moved ahead 141 pts. to settle at 15,617, near its all-time peak.
Valuations for cyclicals still favourable
Equities: We continue to be cyclically oriented but are cognizant of anti-trade rhetoric and any potential Trump disappointment. We are also keeping a close eye on gold as recent strength has been bothersome. Our overarching fear however is for rising yields as the world moves away from a zero rate environment and the implications for defensive stocks. As such we prefer the risk/reward of cyclicals over defensives as we still find valuations for cyclicals to be favourable and improving economic activity to be supportive of our thesis. In our opinion, broad market pullbacks will only be shallow (mid-single digits).