Market Watch for December 1, 2017

Global Portfolio Advisory Group

December 15, 2017

Big Picture

Central banks, tax bill in focus

It was an action-packed week filled with economic, political and monetary policy news. Starting in Washington, the Senate and House agreed upon a final version of a tax bill set to be released today with votes planned for early next week. The bill would reduce the top individual tax rate from 39.6% to 37% and the corporate rate would fall to 21%. Also in the U.S., the Federal Reserve increased interest rates by a quarter-percentage point Wednesday, the third rate rise this year. Fed Chairwoman Janet Yellen also penciled in three more increases for 2018 in what was her last monetary policy meeting. In U.S. economic news, retail sales surged 0.8% in November versus the previous month which lifts the outlook for Q4 consumer spending. In Europe, the European Central Bank left rates unchanged Thursday even as new projections pointed to strong growth for the eurozone through 2020. The Bank of England similarly stood pat on rates also on Thursday however it did tighten borrowing costs in the U.K. last month for the first time in a decade. Also in the U.K., retail sales posted a strong 1.1% advance in November from October with the annual growth in purchases up 1.6%. Continuing in Europe, the EU and Britain agreed on terms of separation opening the door for the two to start talks on a transitional deal immediately following Brexit in March 2019 and the outlines of a future trade deal. Looking ahead, market watchers will get a look at the strength of the Canadian economy next week with retail sales and monthly GDP releases.


U.S stocks end higher

On Thursday the Dow hit an intraday high before closing lower breaking a five-day win streak. For the four days covered in this report, the Dow advanced 179 pts. to close at 24,508, the S&P 500 added 1 pt. to end at 2,652 and the Nasdaq rose 16 pts. to finish at 6,856. The TSX fell 80 pts. over the period ending Thursday’s session at 16,016.



Strategy hits the mark in 2017; looking forward to 2018

Strategy: With 2017 coming to a close, we can take this opportunity to take stock of market performance and our asset allocation strategy over the past year. To recap, our strategy has been premised on carrying a large overweight in equities versus an underweight in bonds, an expectation international markets would outperform U.S. markets, and maintaining overweight exposure to cyclical sectors including financials, industrials, materials, technology, energy, consumer discretionary and health care. In the end we find equity markets posted solid returns year-to-date through 12 Dec/2017 (S&P500: +21.1%; S&P/TSX: +8.1%, all in local currency terms) while fixed income struggled to keep its head above water (U.S. and Canada: +3.3%). Meanwhile, sector performance reflected prevailing macro trends as cyclical sectors (with the exception of energy) outperformed broad market indices. Thus, our investment strategy was generally successful in focussing on the right asset allocation settings. For 2018, we expect economic growth to remain near multi-year highs, inflation to modestly tick higher, interest rates and bond yields to gradually climb, volatility to trend steadily upwards and equity market gains to moderate. Thus, we stick with our equity-over-fixed income preference.  We look for greater dispersion in cyclical sector outperformance (overweight: industrials, financials, energy, materials; marketweight: technology, consumer discretionary, health care) and deepening underperformance of interest rate-sensitive defensives (utilities, telecom, real estate, consumer staples). Please see the latest edition of our quarterly investment strategy flagship report “Portfolio Compass” for more details.


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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