November 4, 2016
Fed stands pat
Market attention moved from U.S. corporate profits to central bankers this week with the U.S. Federal Reserve the leading player. The Fed’s two-day policy meeting concluded Wednesday with no changes to monetary policy. Bank officials did, however, send signals that they intend to raise rates in December at their final scheduled meeting of the year. Turning to U.S. corporate profits, Q3 earnings season is on pace to snap a multi-quarter decline according to FactSet which forecasts a 1.6% blended earnings growth rate for the S&P 500. In the U.K., the Bank of England said Thursday it would shelve plans to lower interest rates as it forecast stronger growth and higher inflation for 2017. Meantime, a British court ruled that the U.K. can’t implement an exit strategy from the EU without a vote from Parliament. Turning to Japan, its central bank opted to leave monetary policy unchanged Tuesday. Short-term rates on some commercial loans remain at minus 0.1% and 10-year government bonds at 0.0%. Perhaps most notably, the BoJ extended its target date to reach 2% inflation to fiscal 2018 from 2017. In the euro zone Tuesday, GDP rose in the currency union by 1.6% yoy in Q3 matching the rise in the previous quarter. Canada also reported GDP data Tuesday that showed real gross domestic product rising 0.2% in August following a 0.4% rise in July. The dip in monthly growth reinforces expectations that the BoC will maintain a cautious stance when it comes to future monetary policy decisions. Looking ahead, two potentially market-moving events are ahead of us. The first is the U.S. jobs report due today (Canada also reports) and the second is Tuesday’s presidential election.
Stocks fell out of the gate to start November with most major equity benchmarks falling the first trading days of the month. In the U.S., the Dow shed 231 pts. to end at 17,930, the S&P 500 dropped 38 pts. to close at 2,088 and the Nasdaq gave back 132 pts. to settle at 5,058. In Canada, the TSX fell 202 pts. to finish at 14,583.
Volatility has arrived
We see equities continuing to outperform government bonds over the coming year given that the unemployment rate is likely to remain low in coming months as the economic expansion continues. We prefer a cyclical bias in our strategy across equities (resources/international) and fixed income (credit). Investors should use occasional bouts of weakness to deploy large cash holdings in our preferred segments. Certainly there are a plethora of geo-political pressures and risks that could trigger spikes in volatility in coming months including U.S. elections (which is resulting in elevated volatility as we speak), Brexit & Eurozone break-up risks, terrorism, etc.
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