Trade tensions emerge
A fresh concern emerged for traders this week as U.S. President Trump announced new metals tariffs on steel and aluminum Thursday. The tariffs are not only expected to be incendiary in terms of retaliatory action by other countries but also inflationary. Rising U.S. inflation has, as market watchers know, rattled markets of late as has the prospect of faster-than-expected rate hikes south of the border. On the interest rate front, new Federal Reserve Chairman Jerome Powell was bullish on the U.S. economy in his first Congressional testimony saying there are no signs of overheating and rate increases will be gradual this year and next. In Canada, the Liberal government tabled its third budget Tuesday with no U.S.-style tax cuts which put American corporate income tax rates below those in Canada. The budget’s focus was instead on gender equality including pay equity for women in federally regulated industries. In economic news, U.S. durable goods orders fell a seasonally-adjusted 3.7% in January from December. The larger-than-expected drop surprised some as it comes on the heels of Trump’s tax overhaul passed in late 2017 which is expected to rev up investments by firms. In related news, U.S. jobless claims fell to the lowest level since 1969, further evidence of a tightening labour market. Meantime, U.S factory activity expanded at the fastest pace in 14 years as the ISM manufacturing index rose to 60.8 in February from 59.1 in January. Turning to China, the existing two-term limit for leader Xi Jinping has been eliminated clearing the way for the Chinese President to govern unchallenged for an undetermined length of time. Looking ahead, Canadian GDP data is released today.
Major North American stock benchmarks slumped the first day of March which was the same way they exited the last day of February. For the four days covered in this report, the Dow fell 701 pts. to close at 24,608, the S&P 500 shed 80 pts. to finish at 2,677 and the Nasdaq gave back 157 pts. to settle at 7,180. In Canada, the TSX also ended in negative territory falling 245 pts. to end Thursday’s session at 15,393.
Cyclical investment strategy recommendation remains intact
Equities: We continue to recommend overweight equity exposure relative to fixed income as part of our investment strategy. This recommendation is premised on a host of reasons including rising global bond yields, strong corporate earnings, relatively better value in equities than fixed income (by our estimation), tighter monetary policy, and increasing U.S. fiscal spend. The recent equity market pullback, despite its speed, was a healthy development, in our view, and gives investors that are overweight cash or fixed income a chance to increase their equity exposure. However, during any subsequent equity market rally, we are doubtful equity volatility will return to the low levels experienced in late 2017. Going forward, in our view, a higher volatility regime and rising inflation expectations suggest the equity bull market should continue in the medium term, but that equity portfolios should carry a bias toward lower valuation and smaller market cap names and cyclical sectors.
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.
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