Portfolio Manager’s Weekly Commentary

Daryl Cooper

October 14, 2016

October 13, 2016

Don and Hillary and entertainment, the real deal is the Bankers and Oil

Is it time to call the election in the US?  I think we are safe to say that Hillary Clinton, as flawed as she may be out “Trumps” the ever increasing shock squawk with the curious frock  who continues to surprise everyone with his rants and temperament.

The implications of this Presidential election are indeed worthy to be aware of; the markets clearly do not like uncertainty so, in our opinion, a Clinton win is stabilizing. But I believe the shape of monetary policy in the US is more important than who is elected President with the limited powers a US President actually has.

Monetary policy of Central banks such as the European Central Bank, the Bank of Japan and especially the US Federal Reserve are the single most important thing happening, with regard to our economic future.

The response of financial markets to the “Fed talk” is what has been moving these markets for a long time. A ¼% rate increase in the US for December appears priced into the market already.  When Colleen and I joined the financial industry back in 1980 you could invest into a guaranteed investment at 16% or better. Today that isn’t possible.

Canada might have to lower rates if our loonie keeps climbing versus the US currency as our economy is not doing well and our deficits keep growing.  We have been saying for a while now that we don’t spend much time worrying about stuff we can’t control. We focus on what we can and that is our client’s comprehensive total wealth strategy. This offering is what we call the RBI Bridging Formula.

It is why after 2008 we adopted the Investment Management system we use that is called Rules Based Investing or RBI for short. It identifies some of the best geographical regions and sectors of the market to invest in and the ones to avoid.

It has been awhile since I updated you on what our indicators are saying.

Oil and Gas has entered the favoured zone with oil now seemingly trying to make $50 per barrel a new base. Time will tell on whether the latest OPEC deal to cut production will hold but currently the sentiment and seasonality is to favour this sector.

The US Dollar compared to the Canadian dollar has been a tug of war for months. Now that the rate hike has been priced in and oil is stabilizing at a higher price the Loonie may take flight.  If the Loonie moves higher Bank of Canada Governor Poloz may be forced to lower Canadian rates next week at their meetings as a strong Loonie is not good for trade.

The world of low interest rates hurts those that need it the most, the average investor, the retiree and those on pensions. The sad reality is that we can’t do much about it, the Central Bankers have created this mess worldwide and it will be a long time before we see normalized interest rates.

The US stock market has settled back into a “not much movement” habit.  Over the past two years, the US stock markets have managed to move from trading-range box to trading-range box.  And after breaking below the most recent ultra-tight, eight-week range, the markets bounced around for a couple of weeks.

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Let’s look at a chart of the S&P 500 on a tighter time frame to see this price consolidation from above in more detail:

line in the sand

In short, a break above the Sept. 22 and Sept. 30 highs with a close above 2,180 should lead to a push up above the all-time highs. A break, and close, below the 2,140 zone will bring our famous “Line in the Sand” back into play.

Heading into the elections, the likelihood of a major move in either direction is lessened, so we’ll likely see quick swing moves up and down as opposed to broad directional moves in either direction.

The Canadian stock market is dominated by two themes, interest rates and oil prices. With Financial and Resource stocks occupying over 60% of the Canadian market it is important to note how each affect the market. Lower rates in Canada would be detrimental to bank and insurance company stocks while higher or at the very least stabilized oil prices are good for our battered resource sector. Neither sector comes without volatility.

International markets: This past week have added an overlay of value stocks to our portfolios which complement our momentum style. This is in the Global and International regions where we sub contract out the work to arenas we don’t have access to.

Emerging markets continue to show strength lately and we have added in a small element of this to our portfolios. Sector specific, we see strength in technology.

Going forward our intermediate term indicators are as positive as they have been all year which would suggest that we are in for some good times over the next six to 10 months once we get this US election over with.

Until then we remain vigilant and ready for anything the market throws at us and ready to defend your hard earned capital against the major market forces that might present themselves. Simply put, we are built to protect at all times and pounce when the opportunities present themselves.

Daryl Cooper
Portfolio Manager
Director, Wealth Management

 

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