October 23, 2019

2019 Third quarter update

At the start of the fourth quarter, the gain on the North American stock markets is their best showing since 1997—in contrast to the more difficult period the markets went through a year ago. Some might remember the extreme volatility that hit the markets in October and December 2018. The advance in the main stock market indexes since the beginning of the year was coupled with gains in commodities and bonds. The simultaneous rise in shares (risk) and bonds (caution) is proof of investor uncertainty with respect to the global economy, the China–U.S. trade dispute and the Federal Reserve’s next steps.

On a more optimistic note, the labour market, which never ceases to surprise, takes us back to the basics. A key element of a nation’s economic health, here Canadian workers, just like their U.S. counterparts, are benefiting. Once again, the sceptics were confounded by the vitality of the Canadian labour market. While forecasters were signalling a mere 7,500 gain for September, the outcome was even more surprising: 53,700 jobs were created. To its credit, Canada has added 456,000 jobs in the last 12 months, a level of growth last seen in 2002. It’s easy to see why the unemployment rate today is hovering around 5.5% for Canada as a whole, a low left unmatched in 40 years. Wage growth, for its part, is fluctuating around 4.3%. This is a headache for Canadian companies seeking additional human resources to support increased operations.

The third quarter started off with a roar in anticipation of the first key rate cut in the United States in nearly 10 years. In August, however, the upturn was quickly reined in by the rising tensions between China and the United States, fuelled by the ongoing trade dispute. September saw a timid recovery in the hopes that the conflict would ease. A few events led by Brexit, the attacks against Saudi oil fields and the fear of a yield curve inversion also increased pressure. These events have shaken investor confidence. It’s easy to see why, at the end of September, the proportion of investors feeling positive about the next six months fell to its lowest level in five years.
Yet, our position remains unchanged. Unless consumer confidence were to plummet, or the trade discussions between our neighbours to the south and the Middle Kingdom were to derail, North America is not likely to experience a recession in the next 12 to 18 months.

Without a doubt, our regular readers will have already noticed, surprisingly enough, that we haven’t yet mentioned the name of a highly controversial president. To those who can no longer bear to hear his name, we sincerely apologize. A financial letter written today against the backdrop of a macroeconomic analysis can’t help but mention the involvement of the man sitting in the White House. Historically excluded from the analytical framework, politics is an unavoidable variable nowadays.
He whom we have tried to avoid naming since the beginning of this newsletter has sent more than 14,000 tweets since his election in 2016. According to the three biggest U.S. financial institutions (Bank of America, Merrill Lynch and J.P. Morgan), the days on which the number of tweets by the president exceeds the daily average of 10 have a negative impact on the stock markets.

And if China wanted Trump to get re-elected?

Unless otherwise informed, we still believe that Trump wants to get re-elected in November 2020. However, we also believe that the vice is gradually closing on him. Could the recent impeachment process actually come to fruition? Could we reach a point where the party concerned decides to quit of his own accord in exchange for an unconditional pardon? This scenario is somewhat likely in our opinion. In the interim, however, we believe that Trump will adopt a tone that will increase his chances of being re-elected. (At the time of writing, we were still awaiting the broad outline of the partial agreement between Beijing and Washington.) Given that he has never stopped saying that the measure of his success is the S&P 500, he should stop causing erratic, long-lasting and detrimental changes to the U.S. economy. In light of the situation, we’ve been banking on him settling with his Chinese counterparts for the last several quarters.

It should be noted that Trump and his counterpart, Xi Jinping, have a few interests in common. While one would like to renew his mandate at the White House, the other would like to celebrate China’s greatness in 2021 (100th anniversary of the Communist Party and 110th anniversary of the Cultural Revolution) and establish the country as a global superpower. Arriving at an agreement with Trump is a given in our opinion. Having to negotiate everything with Joe Biden or even Elisabeth Warren could be just as complicated considering their positions on the environment, human rights and labour standards.

Despite everything we can read or attempt to predict, there comes a time when our vision and our strategy can/must shift. It’s simply a matter of being wise enough to remember that nothing can be taken for granted. If we believe that the risk of a recession remains low and that the stock markets suddenly have much more to offer, we’ll continue to believe in the importance of adding a defensive component to our portfolios. Our bias towards allocating assets with a minimum percentage of fixed income remains, especially for all of our clients who have a good to moderate risk tolerance. We know perfectly well that, in the long term, a portfolio’s “growth” component (i.e., the portion invested in stocks) will produce better returns than the fixed-income portion (bonds, guaranteed investment certificates, debentures, etc.). On the other hand, we believe that only the investor can define “long term.” If emotion has to be eliminated from investment decision-making, then we have to take it into account when assessing the needs and behaviours of the people who entrust their assets to us. Bottom line: there is no one-size fits all. It’s up to us to find the best seat for you and to ensure that it’s comfortable regardless of the forecast.

Thank you again for the trust you put in our team.