Market Watch for February 2, 2018

Global Portfolio Advisory Group

February 2, 2018

Big Picture

Volatility returns

Volatility returned to global equity markets this week despite upbeat economic data as traders became wary central banks may have to raise interest rates faster than originally thought. On Wednesday, the U.S. Federal Reserve met for its regularly scheduled policy-setting meeting and made no changes to interest rates. The Fed did acknowledge, however, that it was growing more confident inflation will rise to its target of 2% which sets the stage for a March interest-rate increase. U.S. jobs data is released today with the gauge of wage growth a key data point for the Fed as rising labour costs generally presage rising prices. Some disappointing U.S. earnings reports late in the week and rising yields on 10-year U.S. Treasury’s added to the unease. Turning to economic data, the eurozone grew at a 0.6% rate in Q4 2017 bringing yoy GDP growth to 2.7%, the strongest run for almost a decade. In the U.S., a measure of consumer confidence rebounded in January to 125.4 from 123.1 in December aided by rising expectations for the economy while a measure of U.S. manufacturing activity remained solidly in expansion territory. Turning to Canada, monthly GDP data released Wednesday showed the economy rebounding 0.4% in November after pausing the previous month.  On a one-year basis the economy advanced a strong 3.5% in November. The central bank is predicting a 2.2% rise in GDP this year with Q4 2017 data set to be released March 4. In NAFTA news, sixth-session talks ended in Montreal with the three principal negotiators expressing levels of optimism unheard during previous sessions.  Round seven of the talks is scheduled for late February in Mexico.



U.S stocks surge in January

Even with major U.S. stock benchmarks registering losses the last week of the month, indexes were able to post strong, percentage gains in January making it the best month since March 2016. For the four days covered in this report, the Dow shed 430 pts. to close at 26,186, the S&P 500 gave back 51 pts. to finish at 2,821 and the Nasdaq moved lower by 120 pts. to settle at 7,385. The TSX was also a money loser through Thursday dropping 389 pts. to end at 15,850.



Global markets continue to reach new highs on solid fundamentals

Equities: In our analysis, the S&P500 (which represents more than half of the global equity market capitalization) is approximately 1% cheaper on a blended 12-month P/E basis than it was a month ago.  We believe with the recent uptick in the U.S. 10-year Treasury yield (approximately 25 basis point rise over the last 30 days), higher equity valuations are warranted.  We would not be surprised to see the S&P500’s valuation exceed its recent (December, 2017) peak shortly.  We believe the move up in yields reflects underlying strength in the U.S. labour market and the global economy, along with the historically low levels from which bond yields are rising.  Until bond yields are considerably higher than they currently are, we believe yields and equity valuations should retain their positive relationship.  Thus, we retain our two-year-old equity overweight bias, with a preference for international regions (including Canada) at the expense of the U.S.  We believe commodity sectors (materials, energy) and financials will comprise the top three performing sectors in 2018.



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