Market Watch for March 2, 2018

Global Portfolio Advisory Group

March 2, 2018

Big Picture

Trade tensions emerge

A fresh concern emerged for traders this week as U.S. President Trump announced new metals tariffs on steel and aluminum Thursday. The tariffs are not only expected to be incendiary in terms of retaliatory action by other countries but also inflationary. Rising U.S. inflation has, as market watchers know, rattled markets of late as has the prospect of faster-than-expected rate hikes south of the border. On the interest rate front, new Federal Reserve Chairman Jerome Powell was bullish on the U.S. economy in his first Congressional testimony saying there are no signs of overheating and rate increases will be gradual this year and next. In Canada, the Liberal government tabled its third budget Tuesday with no U.S.-style tax cuts which put American corporate income tax rates below those in Canada. The budget’s focus was instead on gender equality including pay equity for women in federally regulated industries. In economic news, U.S. durable goods orders fell a seasonally-adjusted 3.7% in January from December. The larger-than-expected drop surprised some as it comes on the heels of Trump’s tax overhaul passed in late 2017 which is expected to rev up investments by firms. In related news, U.S. jobless claims fell to the lowest level since 1969, further evidence of a tightening labour market. Meantime, U.S factory activity expanded at the fastest pace in 14 years as the ISM manufacturing index rose to 60.8 in February from 59.1 in January. Turning to China, the existing two-term limit for leader Xi Jinping has been eliminated clearing the way for the Chinese President to govern unchallenged for an undetermined length of time. Looking ahead, Canadian GDP data is released today.


Stocks slump

 Major North American stock benchmarks slumped the first day of March which was the same way they exited the last day of February. For the four days covered in this report, the Dow fell 701 pts. to close at 24,608, the S&P 500 shed 80 pts. to finish at 2,677 and the Nasdaq gave back 157 pts. to settle at 7,180. In Canada, the TSX also ended in negative territory falling 245 pts. to end Thursday’s session at 15,393.


Cyclical investment strategy recommendation remains intact

Equities: We continue to recommend overweight equity exposure relative to fixed income as part of our investment strategy. This recommendation is premised on a host of reasons including rising global bond yields, strong corporate earnings, relatively better value in equities than fixed income (by our estimation), tighter monetary policy, and increasing U.S. fiscal spend. The recent equity market pullback, despite its speed, was a healthy development, in our view, and gives investors that are overweight cash or fixed income a chance to increase their equity exposure. However, during any subsequent equity market rally, we are doubtful equity volatility will return to the low levels experienced in late 2017. Going forward, in our view, a higher volatility regime and rising inflation expectations suggest the equity bull market should continue in the medium term, but that equity portfolios should carry a bias toward lower valuation and smaller market cap names and cyclical sectors.



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.

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.