An Expected Adjustment
In the generally sideways moving markets in the month of June, currencies were the main factor when looking at Canadian Dollar returns. Most developed market currencies gained against the U.S. Dollar. While the U.S. economy remains strong, its pace is slowing with consensus GDP growth forecasts declining to a 2.2% growth rate. At the same time, the Central Banks in the U.S., Canada, the U.K. and Europe are expressing more hawkish views for their monetary policy. A July 12th rate increase in Canada is looking likely, and U.K and European rate increases later this year are looking more likely. In the U.S., the interest rate increases may be over for the rest of 2017, but it will be replaced by the Fed action to reduce the amount of bonds the Central Bank holds which will result in monetary tightening.
|June ’17||Y-T-D||1 Year||3 year||5 year||10 year|
|S&P/TSX Composite||– 0.75%||+ 0.74%||+ 11.05%||+ 3.08%/yr.||+ 8.74%/yr.||+ 3.89%/yr.|
|S&P 500 (C$)||– 3.41%||+ 4.55%||+ 15.57%||+ 14.62%/yr.||+ 17.81%/yr.||+ 7.03/yr.|
|MSCI EAFE (C$)||– 4.22%||+ 8.01%||+ 17.19%||+ 5.16%/yr.||+ 11.03%/yr.||+ 0.19%/yr.|
* Source: Equity Index and Currency Data: Bloomberg. Data as of June 30, 2017
Having reached the halfway mark of 2017, global equity markets have notched impressive gains, leaving some profit-taking potential amidst the seasonal headwinds of the summer months and possible complacency given markets haven’t experienced a correction in excess of 6% in an unusually long time (since February 2016). Thus, while we remain bullish on the medium-term prospects for global markets given solid fundamentals, in the near-term we advise caution in putting significant amounts of new money to work. Instead, we would view any material pullback in markets as an attractive opportunity for long-term investors.
The sector rotation that Scotia Wealth Management’s Global Portfolio Advisory Group (GPAG) has been forecasting (moving from technology to cyclical sectors such as financials, industrials, energy and materials), appears to be underway and expect these trends to continue at the start of the third quarter. Despite the recent delay of the U.S. health care bill vote, GPAG believes the health care sector offers a good blend of growth, value and investor positioning.
A glut of crude oil inventories has many global investment banks now forecasting prices to remain in the $45 to $50 U.S. range. This should temper the U.S. production growth and put a floor under this commodity’s price.
Markets are paying close attention to the Trump administration’s ability to get its healthcare legislation passed as an indicator that other top priorities (tax changes and infrastructure spending) will be implemented. The sooner health care is resolved, the faster the Trump administration can move on to its initiatives to boost the economy. Considering the Congressional Budget Office recently estimated the Senate bill would leave an additional 22 million Americans uninsured, and the Senate vote was postponed until after the U.S. Independence Day, that process could take some time. If the American Health Care Act (A.H.C.A.) doesn’t get resolved before the August break, Congress will run into deadlines for the U.S. budget and debt ceiling, which could further delay the administration’s plans.
In summary, while I continue to believe that there will be a small and necessary correction in the markets over the summer months, I believe that globally diversified portfolios will return mid-single digit returns over the next twelve months. Expected market pullbacks should be viewed as buying opportunities for long-term conservative investors.
Mailey Rogers Group is here to help and we welcome any questions you may have.
On a personal note, Victoria and I are travelling to Bulgaria in the middle of this month to cheer on Team Canada at the U23 World Rowing Championships! Our daughter Madison was one of eight rowers selected to our U23 National team – very exciting for us and a great accomplishment for our daughter. I’ll let you know the outcome on next month’s update.
If you are travelling this month, I wish you a pleasant trip. Stay safe!
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group