Diversification Continues to Work
In the month of May, equities provided superior returns to bonds by a 1.2% margin in the U.S. and a 2.8% margin in Europe. In Canada however, stocks retreated while bonds gained.
|May ’17||Y-T-D||1 Year||3 year||5 year||10 year|
|S&P/TSX Composite||– 1.52%||+ 0.41%||+ 9.13%||+ 1.67%/yr.||+ 5.92%/yr.||+ 0.88%/yr.|
|S&P 500 (C$)||+ 0.13%||+ 8.24%||+ 18.67%||+ 16.02%/yr.||+ 19.21%/yr.||+ 7.12/yr.|
|MSCI EAFE (C$)||+ 2.02%||+ 12.77%||+ 16.92%||+ 6.36%/yr.||+ 13.15%/yr.||+ 0.53%/yr.|
* Source: Equity Index and Currency Data: Bloomberg. Data as of May 31, 2017
There continues to be a lot of political “noise” out of Washington and it seems that is unlikely to change any time soon! The underlying fundamentals continue to indicate that the U.S. economy is strong with full employment, low inflation, strong corporate earnings and continually improving corporate balance sheets. For example, to May 30th, with 98% of the U.S. companies reporting their first quarter results, year-over-year earnings are up 18% and revenues are up 8%. 75% of the U.S. companies have exceeded analyst’s forecasts. In Canada, with 94% of the companies reporting their first quarter earnings, year-over-year growth of earnings is 43% (from recovering energy prices) and revenues are up 10%. This data provides us with the confidence that the probability of a recession remains very low.
Equities remain over-weighted in most of the portfolios we manage as they continue to be the asset class we believe will provide the best returns in the next 12 – 18 months. We continue to believe that the probability of a small correction of about 5% remains likely over the summer months. We also believe that shifting some geographic allocation from the U.S to Europe will yield favourable results. The headwinds Europe faces with political risks and fears of a European breakup are turning to tailwinds due to recent election results and an improving sentiment.
There may be some opportunities in the energy sector as many parts of the sector have corrected by more than a third. Sentiment has soured and investors are growing impatient yet the fundamentals are improving. OPEC’s recent decision to extend their production cap for another nine months will help to balance supply and demand with the expectation that the price of oil will settle back into the low $50 range.
It is expected that the U.S. will have two more ¼% interest rate hikes in 2017 and is currently pricing in a 100% probability that the first one will come in June. At this point it is expected that the next one will be in either September or December. If the Fed begins to reduce the amount of bonds the Central Bank holds, as they have indicated, further rate hikes will be put on hold as a result of this monetary tightening.
B.C politics continues to be interesting as the Liberal party has indicated that they will call the house back sometime this month and if they fail a vote of confidence (as is expected), the coalition of NPD and Green parties are likely to have a chance to govern.
In summary, markets remain distracted by the unpredictable and ever changing U.S. political scene. Pulling out of the Paris Climate Accord, triggering the 90-day notice to renegotiate NAFTA, investigations into election meddling, Russian connections with Trump’s circle and the recent contesting by both sides of the aisle to the first budget proposal will all continue to make the markets ebb and flow as new breaks. With only about a month to go before Congress’ August break, time is becoming a factor the U.S. administration’s ability to implement its key initiatives.
As mentioned previously, while we continue to believe that there will be a small and necessary correction in the markets over the summer months, we believe that globally diversified portfolios will provide 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.
Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group