Market Watch for May 26, 2017

Global Portfolio Advisory Group

May 26, 2017

Big Picture
OPEC reaches output agreement

It was an action-packed week filled with central bank news, political developments and market-moving events. In Vienna, OPEC and other oil allies renewed an agreement Thursday to keep production at reduced levels extending a decision reached last year. The agreement, which other non-OPEC producers joined, prolongs the cuts through March 2018 after it became clear last year’s efforts failed to eliminate the global oversupply or lead to sustained price recovery. Meantime, minutes from the U.S. Federal Reserve’s early-May meeting were released Wednesday. The minutes show consensus among bank officials that it “would soon be appropriate” for an interest rate increase which could come as early as the next meeting set for June 13-14. Also in central bank news, the Bank of Canada left its key lending rate unchanged at 0.50% at its policy-setting meeting Wednesday. With the decision to stand pat widely expected the real news lay in the increased sense of optimism in the bank’s statement regarding Canadian economic activity. The upbeat tone suggests bank officials may be moving toward the first rate hike in nearly seven years. South of the border, the Trump administration released details of its budget proposal which promises significant cuts to taxes and entitlements with spending jumps for the military, infrastructure and a new parental leave program. Looking ahead, we’ll get the second of three looks at U.S. GDP growth for Q1 today. The Commerce department provides market watchers with three reads on GDP – advance, preliminary and final – with the first two providing opportunities for upward and downward revisions as more data becomes available. The department last month estimated Q1 GDP growth at a 0.7% annual rate.

US stocks remain buoyant

U.S. stocks climbed higher through Thursday despite the U.K. bombing which, like other recent terrorist events, have had little impact on capital markets. For the four days covered in this report, the Dow added 278 pts. to close at 21,082, the S&P 500 moved ahead 34 pts. to close at 2,415 and the Nasdaq rose 112 pts. to close at 6,205. In Canada, the TSX ended the period down 48 pts. to settle at 15,410.

Strong earnings suggest solid fundamentals

Strategy: Global markets have generally grinded sideways over the past few weeks as they confronted a myriad of counter-balancing forces including a French presidential election, White House controversies including the firing of the Director of the FBI, oil prices oscillating in a 20% range, escalating tensions with North Korea, Chinese measures to delever the domestic financial system, etc. Closer to home, Moody’s downgrading of Canada’s banks’ credit ratings capped off a period of general underperformance in Canadian stocks, heightening international focus on elevated household debt levels and over-heated real estate markets.  In the U.S., a better-than-expected first quarter earnings season helped to remind investors of solid corporate fundamentals, powering the S&P500 and Nasdaq to new all-time highs. Given May-to-September tends to be a seasonally weaker period for equities and markets have lost a measurable degree of momentum in recent weeks, we would recommend  some caution in putting new money to work in the near-term. With the VIX index hitting its lowest level since 1993, a possible bout of volatility over the summer could provide an attractive entry point. To be clear, we continue to believe recession risks for the coming year remain low and maintain our bullish view of global equities over the medium-term.

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