Market Watch for May 19, 2017

Global Portfolio Advisory Group

May 19, 2017

Big Picture
Japans extends growth streak

It was a big week filled with political drama and upbeat economic news starting with Japan. The world’s third-largest economy extended its stretch of growth to five quarters with Q1 GDP notching a better-than-expected 2.2% rise. That makes it the longest expansion since 2006 offering hope that Japan may be returning to stable – albeit slow growth – after years of government spending and loose monetary policy. In Washington, the headline event was the appointment of a special counsel to look into Russian intervention in the 2016 presidential election. The move rattled markets Wednesday as traders grew concerned the Trump administration may have difficulty getting its pro-business agenda passed by lawmakers due to the turmoil. Also in Washington, U.S. lawmakers were informed by letter that Trump intends to launch formal negotiations on the North American Free Trade Agreement with Canada and Mexico. The talks could start as soon as 90 days and may fundamentally alter the 23-year-old pact. In commodity news, Russian and Saudi Arabian oil ministers have verbally agreed to extend production cuts to the end of March 2018. The cuts are designed to bring down global oil inventories and will be formally tabled at an OPEC meeting in Vienna May 25. In the U.K., retail sales jumped a better-than-expected 2.3% in April versus the previous month when sales fell 1.4%. Meantime, U.K. consumer prices rose 2.7% yoy in April, the fastest pace in over 3 years. Looking ahead, we’ll get a look at Canadian inflation data and retail sales today with a Bank of Canada policy meeting scheduled next Wednesday.

Markets
Stocks sell-off, pare losses

North American stock benchmarks sold off Wednesday – the largest decline this year – but buyers quickly returned the following day paring losses. For the four days covered in this report, the Dow fell 233 pts. to close at 20,663, the S&P 500 gave back 25 pts. to close at 2,365 and the Nasdaq shed 66 pts. to close at 6,055. In Canada, the TSX closed out the period down 260 pts. to settle at 15,277.

Equities/Strategy
Market volatility picks up heading into the summer

Our 2017 bullish stance on equities has materialized as the market hit a string of new all-time highs recently. Despite this performance, the last couple of weeks have disappointed us as internal market dynamics have begun to weaken with every new high on growing North Korean concerns, softening economic data (Q1 GDP, CPI, ISM), Chinese growth anxiety, and discouraging political noise out of Washington along with legislative gridlock. We believe caution on broad based new-money purchases for the next 1-2 months could be prudent as the odds of a typical 5% pullback have increased. Such a pullback should reset investor positioning and would present an ideal entry point into our bullish year-end view (premised on low recession risks, breakout corporate earnings, peak corporate buybacks feeding into rising capital goods orders, etc.).

 

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