February 2017 Review and Market Outlook

Market commentary by Kim Mailey

March 3, 2017

The Market Clearly Likes the New U.S. Administration!

The global markets notched impressive gains in February – boosted further for Canadian investors because of the 2% decline in the loonie during February.

In my view, fundamentals remain constructive for risk asset classes (equities) to once again be the best performing asset class in 2017. Equities are being propelled higher from strengthening economic growth, declining volatility, rising inflation and bond yields, low recession probabilities, improving flow of funds into equities and a recovery in corporate earnings growth.

Contacts
Februrary ’17 Y-T-D 1 Year 3 year 5 year 10 year
S&P/TSX Composite + 0.09% + 0.73% + 19.74%/yr. + 2.72%/yr. + 4.02%/yr. + 1.67%/yr.
S&P 500 (C$) + 5.63% + 4.22% + 20.02% + 15.17%/yr. + 18.42%/yr. + 6.66%/yr.
MSCI EAFE (C$) + 3.06% + 2.77% + 10.39% + 2.86%/yr. + 8.52%/yr. – 0.55%/yr.

* Source: Equity Index and Currency Data: Bloomberg. Data as of February 28, 2017

Strategy:

With most of the companies in the U.S. now having reported their fourth quarter earnings, they grew at 4.6% year-over-year. In the first quarter they are expected to grow by 9.6%. President Trump’s first speech to Congress last night was well received and he confirmed his intention to substantially lower corporate tax rates, lower middle class tax rates, as well as directing a big spend in the areas of defence and infrastructure. If this were all to become reality it would translate into higher corporate profits, more money for consumers to spend, higher employment and consumer confidence. But will it all become reality?

Equities:

Earnings and revenue momentum should remain positive for all of 2017 and perhaps into 2018. Longer-term indicators are still pointing towards higher equity prices in the medium and long term and as such any short term weakness, in my opinion, will only be in the mid-single digits and difficult for most investors to time. The trigger for a pull-back could be from a number of upcoming events such as when the U.K’s Prime Minister triggers Article 50 to start Brexit, the Netherland’s election on March 15, the U.S. Federal Reserve’s meeting on March 15, the election in France on April 23 and May 7, and the election in Germany on September 24.

Following strong economic data since the beginning of the year, the Fed seems to be moving closer to its first rate hike of 2017. William Dudley, head of the New York Fed recently said “Data we’ve seen over the past couple of months is very much consistent with the economy continuing to grow at an above-trend pace.” As such, the probability of a rate increase this month has risen to 80%.

Outside of the U.S., economic environments in Europe and Asia have also improved since the beginning of the year. The Eurozone Consumer Price Index for January came out in line with expectations and manufacturing Purchasing Manager’s Index beat estimates. In China, both the Consumer’s Price Index and the Producer’s Price Index announcements surprised on the upside. There are also growing expectations that the Chinese government has plans to expand its infrastructure spending, which would further drive up world commodity prices.

Summary:

In conclusion, for the portion of your portfolio intended to provide conservative growth, it should be weighted towards an actively managed, globally diversified equity portfolio. I expect equities to be the best performing asset class in 2017, but the road higher will not be a straight one! Expect some modest pullbacks during the year (mid-single digits), but don’t believe you can time this. Rates are not expected to move higher in Canada for some time yet. Owning some bonds in your portfolio will lessen the volatility of a pure equity portfolio but they should be short maturity bonds. Any larger amounts of capital you may have to draw on in the next year should be set aside in interest bearing guaranteed securities.

Mailey Rogers Group is hosting two learning opportunities that may be of interest to you:

  1. Considerations for your transfer of wealth. The timing and the amounts should be considered to ensure the gift is more helpful than harmful. Join our Estate and Trust Consultant for a Lunch and Learn at our Ambleside office on Thursday, April 6.
  2. Investing 101 is a women-only social as part of our Women’s Initiative that will take place in the early evening of Wednesday, May 10 in our Ambleside office. Wine and cheese followed by the presentation.

Seating is limited for both, so please RSVP to Tannis Fuller at 604.913.7033 or tannis.fuller@scotiawealth.com.

Mailey Rogers Group is here to help and we welcome any questions you may have.

Sincerely,

signature
Mr. Kim Mailey, CFP
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group
1555 Marine Drive,
West Vancouver
Tel: 604.913.7013
www.maileyrogers.com
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