Market Watch for Friday October 20, 2017

Global Portfolio Advisory Group

October 20, 2017

Big Picture

Politicians take centre stage

There was plenty of political news to keep market watchers occupied this week as important events unfolded in North America, Europe and China. In China, the 19th Communist Party congress got underway mid-week with the country’s President Xi Jinping anointed to a second five-year term. In opening remarks, Xi set a goal to build a modern nation by 2035 and a rich, global power by 2049. The twice-a-decade congress is set to endorse Xi’s political supremacy with the potential to extend his authority past five years putting him on par with some of China’s most powerful, revered leaders such as Deng Xiaoping or Mao Zedong. In North America, NAFTA negotiators have extended talks into 2018 and appear to be moving farther and farther away from a successful outcome. The U.S. is maintaining its hard stance against Canada and Mexico on a range of topics and the basic architecture of an agreement. If the deal ends it will mark an important turning point in continental commerce as NAFTA has guided trade among the three countries for a quarter century. Turning to the U.K., British Prime Minister Theresa May went to Brussels Thursday to meet with EU chiefs to try to re-ignite stalled Brexit talks. The impasse stems from Britain’s reluctance to reveal how much it will pay to leave the Bloc which is a pre-condition set by the EU before tabling future trading agreements. Also in Europe, the potential declaration of independence threatened by the Catalan province in Spain is one step closer to reality despite threats of the central government removing decision-making powers from Catalonia. Turning to economic news, China released Q3 GDP data which showed the world’s second-largest economy grew 6.8% yoy which puts it on target to meet 2017 growth projections. Returning to the U.S., politicians passed a budget blueprint Thursday that represents the first step toward revamping the tax code which bodes well for Trump’s tax reform. Finally, corporate America continues to deliver when it comes to earnings as roughly 23% of S&P 500 companies reporting have beat forecasts.



Stocks grind higher

Most North American stock benchmarks continued their ascent this week with U.S. bellwethers notching more record highs and the Dow crossing the milestone 23,000 point level. For the four days covered in this report, the Dow rose 292 pts. to close at 23,163, the S&P 500 added 9 pts. to end at 2,562 and the Nasdaq ended flat at 6,605 pts. In Canada, the TSX ended up 11 pts. to settle at 15,818.



Markets continue to impress following U.S. election

Strategy: Global markets have continued to grind higher in recent weeks despite volatile headlines thanks largely to supportive medium-term market fundamentals. In particular, economic growth across major economies is hitting 7-year highs while the recovery has broadened out into a global synchronized upturn for the first time since the 2008/09 financial crisis. We expect this to continue into 2018 as well with unemployment rates remaining low and central banks keeping monetary conditions at stimulative levels despite some very modest interest rate hikes. Most of our indicators point to ongoing economic recovery with the earliest start to a recession pointing to 2019 with many indicators suggesting this may not start until 2020. Thus, there remains ample time left in the current equity bull market to view any near-term pullback (5%-10%) in stock markets as an attractive opportunity to put cash to work. We believe investments closely correlated with economic growth trends (cyclical assets) should outperform given our constructive global macro-economic outlook. As a result, we are overweight equities versus bonds with a preference for cyclical sectors (industrials, financials, materials, energy) and Canadian/international exposure over the U.S. for 2017/18. The near-term focus for markets includes third-quarter earnings reports (we expect results to beat modest consensus estimates), the naming of the next Federal Reserve Chair, a possible breakthrough or breakdown in NAFTA renegotiation talks, the European Central Bank’s expected announcement (Oct. 26th) to moderate monetary stimulus, and ongoing headline risks around possible U.S. tax cuts, North Korean missile tests and U.S.-Iran tensions



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