Volatility returned to global equity markets this week despite upbeat economic data as traders became wary central banks may have to raise interest rates faster than originally thought. On Wednesday, the U.S. Federal Reserve met for its regularly scheduled policy-setting meeting and made no changes to interest rates. The Fed did acknowledge, however, that it was growing more confident inflation will rise to its target of 2% which sets the stage for a March interest-rate increase. U.S. jobs data is released today with the gauge of wage growth a key data point for the Fed as rising labour costs generally presage rising prices. Some disappointing U.S. earnings reports late in the week and rising yields on 10-year U.S. Treasury’s added to the unease. Turning to economic data, the eurozone grew at a 0.6% rate in Q4 2017 bringing yoy GDP growth to 2.7%, the strongest run for almost a decade. In the U.S., a measure of consumer confidence rebounded in January to 125.4 from 123.1 in December aided by rising expectations for the economy while a measure of U.S. manufacturing activity remained solidly in expansion territory. Turning to Canada, monthly GDP data released Wednesday showed the economy rebounding 0.4% in November after pausing the previous month. On a one-year basis the economy advanced a strong 3.5% in November. The central bank is predicting a 2.2% rise in GDP this year with Q4 2017 data set to be released March 4. In NAFTA news, sixth-session talks ended in Montreal with the three principal negotiators expressing levels of optimism unheard during previous sessions. Round seven of the talks is scheduled for late February in Mexico.
U.S stocks surge in January
Even with major U.S. stock benchmarks registering losses the last week of the month, indexes were able to post strong, percentage gains in January making it the best month since March 2016. For the four days covered in this report, the Dow shed 430 pts. to close at 26,186, the S&P 500 gave back 51 pts. to finish at 2,821 and the Nasdaq moved lower by 120 pts. to settle at 7,385. The TSX was also a money loser through Thursday dropping 389 pts. to end at 15,850.
Global markets continue to reach new highs on solid fundamentals
Equities: In our analysis, the S&P500 (which represents more than half of the global equity market capitalization) is approximately 1% cheaper on a blended 12-month P/E basis than it was a month ago. We believe with the recent uptick in the U.S. 10-year Treasury yield (approximately 25 basis point rise over the last 30 days), higher equity valuations are warranted. We would not be surprised to see the S&P500’s valuation exceed its recent (December, 2017) peak shortly. We believe the move up in yields reflects underlying strength in the U.S. labour market and the global economy, along with the historically low levels from which bond yields are rising. Until bond yields are considerably higher than they currently are, we believe yields and equity valuations should retain their positive relationship. Thus, we retain our two-year-old equity overweight bias, with a preference for international regions (including Canada) at the expense of the U.S. We believe commodity sectors (materials, energy) and financials will comprise the top three performing sectors in 2018.
This material does not include or constitute an investment recommendation, and is not intended to take into account the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your particular circumstances and talk to your investment advisor.
This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.