Market Watch for February 16, 2018

Global Portfolio Advisory Group

February 16, 2018

Big Picture

Stability returns

There was a welcome return to stability on global equity markets through Thursday as concerns about inflation, interest rates and bond yields dissipated. The one data point of worry this week – U.S. consumer prices – came and went without incident Wednesday despite the inflation gauge rising a more than expected 0.5% in January, up 2.1% from a year earlier. A second measure of inflation – the prices businesses charge for goods and services – also rose in January from a month earlier as the U.S. Producer Price Index advanced a seasonally adjusted 0.4%. From a year earlier, producer prices advanced 2.7%. Both indicators point to firming inflation south of the border which may force the U.S. Federal Reserve to quicken the pace or number of interest rate increases it has previously communicated. The Fed next meets March 20-21 and has pencilled in three quarter-percentage-point rate rises for 2018. Still on the inflation front, U.K. consumer prices held at 3% yoy in January from December with Bank of England policy makers telegraphing intensions for successive rate rises with the first potential move coming in May. Turning to Japan, the world’s third largest economy extended its longest streak of economic growth since the late 1980s after reporting annualized Q4 GDP growth of 0.5% from the previous quarter. Yoy GDP advanced 1.6% in 2017 – the fastest pace in seven years – which will reassure BoJ officials that the economy is generating stable, albeit moderate, growth. In Canada, the Liberal government announced it will table the federal budget February 27 and last Friday’s jobs report for January showed a net job loss of 88,000 positions, the steepest decline in nine years. Looking ahead, we’ll get a look at the U.K. employment situation next week as well as GDP data.



Stocks rebound

Most major North American stock benchmarks rebounded this week recovering much of the ground lost after two bruising weeks. For the four days covered in this report, the Dow added 1,010 pts. to close at 25,200, the S&P 500 gained 112 pts. to close at 2,731 and the Nasdaq moved ahead 382 pts. to settle at 7,256. In Canada, the TSX ended the period 317 pts. higher to close Thursday’s session at 15,391.



Market correction not reflective of strong fundamentals

Equities: The combination of a market pullback and analysts upwardly revising their earnings estimates to reflect U.S. tax reform has caused the S&P500 blended 12-month forward price-to-earnings ratio to drop 7% from its recent peak. We believe this is a meaningful pullback, as the recent selling, in our opinion, has been disconnected from economic fundamentals (strong earnings growth, healthy labour dynamics). Thus, we retain our two-year-old equity overweight bias, with a geographical preference for Canada, Europe, Japan and emerging markets at the expense of the U.S. We believe commodity sectors (materials, energy), industrials and financials will comprise the top four performing sectors in 2018.


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