Strong Fundamentals – poor sentiment
Business and consumer sentiment reading in the U.S. slipped from their recent highs. Many of the respondents to these surveys cited intensifying global trade tensions as a key concern weighing on confidence. The primary transmission channel through which a sustained drop in confidence makes its way into the broader economy is a gradual cool-off in consumer spending, business hiring and investment plans.
|April ’18||YTD||1 Year||3 year||5 year||10 year|
|S&P/TSX Composite||+ 1.57%||– 3.71%||+ 0.14%||+ 0.83%/yr.||+ 4.51%/yr.||+ 1.14%/yr.|
|S&P 500 (C$)||– 0.33%||+ 1.40%||+ 4.33%||+ 10.43%/yr.||+ 16.11%/yr.||+ 9.29%/yr.|
|S&P 500 (U$)||+ 0.27%||– 0.96%||+ 10.07%||+ 8.29%/yr.||+ 10.64%/yr.||+ 6.69%/yr.|
|MSCI EAFE (C$)||+ 1.39%||+ 2.02%||+ 4.69%||+ 4.16%/yr.||+ 8.21%/yr.||+ 1.96%/yr.|
* Source: Equity Index and Currency Data: Bloomberg. Data as of April 30, 2018
Scotia Wealth Management’s Global Portfolio Advisory Group believes that trade concerns will level off given most tariff threats have not been followed up with substantive policy action with the exception of U.S. steel and aluminum tariffs. Even on this note, the numbers of countries affected by this tariff has been significantly reduced since it was first proposed.
Consumers and businesses may become less sensitive to these headlines if most tariffs do not materialize and instead give way to negotiations. A positive NAFTA renegotiation would help sooth concerns.
Despite a steady stream of troubling issues such as trade wars, geopolitical tensions, U.S. Congressional hearings on data mining and the ongoing U.S. political uncertainty, solid underlying fundamentals have provided a firm foundation for the long-term uptrend in global markets, in my view. These fundamentals include global economic growth holding near seven year highs, fiscal policy stimulus supporting the economic expansion this year and next while monetary policy is being tightened at a very modest pace, and commodity prices having recovered to three year highs.
With investor sentiment currently at two year lows and market valuations having significantly improved, I expect the path of least resistance is a slow reversion to previous highs in coming weeks and months, notwithstanding elevated levels of volatility remaining with us. In this regard, possible upcoming market drivers include continued strong first-quarter corporate results (forecast to enjoy nearly a 20% earnings growth), new U.S. threats of additional tariffs on Chinese goods, NAFTA negotiations entering a new critical phase, and OPEC and other cooperating major oil producing nations meeting to negotiate oil production quotas, among many others.
Slightly more than half of S&P 500 companies have now reported 2018 first quarter results so far. Of those, 79% have delivered a positive earnings-per-share surprise according to FactSet data. If that number can be maintained, it would mark the highest level reported in the current bull market, which is over nine years old. Currently 74% of companies have reported a positive sales surprise, which is well above the five year average of 57%, and blended revenue growth is 8.4% year-over-year. This strong earnings and revenue backdrop provides strong fundamental support for equity prices. An easing of trade and geopolitical uncertainties would also support risk asset prices. I continue to recommend overweight exposure to equities relative to fixed income and to Canadian and international securities relative to their U.S. counterparts.
Most reliable recession risk indicators (such as yield curve slope, real interest rates, output gap, unemployment rate, credit spreads, etc.) continue to suggest the odds of a recession materializing in the next 12 months remain modest. Thus, notwithstanding a typical increase in market volatility at this point in the cycle, we remain constructive on equities relative to fixed income with a bias toward economically-sensitive segments across asset classes.
While the Korean peninsula is taking steps toward reunification the Iran nuclear deal seems to be in jeopardy. Fasten your seatbelts for more turbulence as the year unfolds but expect a well-diversified actively managed portfolio to provide reasonably attractive returns over the next twelve months.
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Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group