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Market Watch: Global Update

09/12/14

Traders eye Fed meeting

In the absence of major economic releases this week, traders turned their attention to next week’s Fed meeting and simmering geopolitical issues. The most notable geopolitical development came Wednesday evening when US President Obama took to the airwaves and authorized airstrikes in Syria and more attacks in Iraq to eliminate Islamic state militants. The moves signal an escalation in the effort to fight the group and they come amid concern on other fronts, including Eastern Ukraine. That’s where a wobbly ceasefire between Russia and Kiev remains in place even though skeptics believe we’re still a long way off from a lasting settlement. Meantime, the topic of Scottish independence is starting to be factored into the markets in advance of a referendum September 18. Reminiscent of referendum days in Quebec, the heads of several major companies – banks, energy producers and retailers – have articulated their desire to move their head offices out of the region if the ‘yes’ vote triumphs (recent polls point to a ‘no’ outcome). Looking ahead, the US rate-setting Federal Open Market Committee meeting next week has taken on greater significance as economic data brightens south of the border. Traders will be watching to see if there is any word on the future pace or mechanics of an interest rate rise and whether the recent disappointment in jobs numbers impacts their thinking. One indicator pointing to a sooner-rather-than-later rate rise is the US dollar. It’s hitting multi-month highs against a number of currencies, including the Canadian dollar.

Markets

Markets step back
Markets stepped back from recent record highs with most major indexes finishing lower over the four-day period covered in this report. In the US, the Dow gave back 82 pts. to close at 17,049 and the S&P 500 fell 10 pts. to finish at 1,997 while the Nasdaq bucked the trend moving 12 pts. higher to settle at 4,591. The TSX was a loser on the week shedding 35 pts. to end Thursday’s session at 15,534.

Our Recommendations

Modest equity market pullback may present select buying opportunities

Equities. Warren Hastings, Associate Director, Portfolio Advisory Group wrote “Through Thursday of this week the S&P/TSX declined 0.2% on a price-only basis, dragged lower by the energy and materials sub-indices. The benchmark WTI crude oil price declined 0.5% likely reflecting a variety of factors including robust domestic U.S. oil production and economic growth concerns (as noted in the IEA’s downwardly revised oil demand forecast released Sep. 11), but also seasonal factors such as US refinery utilization. This suggests crude prices may firm up and support related equities as utilization rates begin to increase in mid-fall and then again in late winter. The S&P/TSX materials sector was impacted by ongoing weakness in several commodities including iron ore and copper. We expect a persistent low bond yield environment and robust M&A activity to support equities and will look to deploy cash opportunistically.”

Global Markets YTD 2014 September 12 USDGlobal Markets YTD 2014 September 12 CAD

Market Watch: Global Update

08/22/14

Economic data trumps concerns

Positive US economic data trumped lingering concerns about the pace of global growth and geopolitical tensions this week. The news was particularly good on the housing front, as sales of previously owned homes south of the border rose to their highest level since last September while the number of housing starts reached their highest level since November. Jobs news was also good with fewer people than expected applying for unemployment benefits last week and on Tuesday inflation moved in the right direction with consumer prices rising 0.1% last month. Meantime, representatives of G7 central banks gathered at Jackson Hole, Wyoming Wednesday for a three-day meeting that takes them through today (Friday). Fed Chairwoman Yellen is expected to address the media on Friday but no new policy announcements are expected. ECB Chief Mario Draghi is also expected to take the podium but unlike Yellen, Draghi may reference a policy shift. Minutes from the Fed’s previous meeting were released Wednesday and they showed officials debating whether to move sooner to increase interest rates. Overseas, a Chinese preliminary manufacturing activity index fell to 50.3 in August from 51.7 in July. That’s the lowest read in three months which fits a recent pattern of disappointing numbers out of the world’s second-largest economy.

Markets

Toronto, New York rally

Stocks rallied this week with the TSX and S&P 500 reaching all-time highs. The TSX closed at 15,561pts. Wednesday – a record – while the S&P 500 closed at 1,992 pts. Thursday which matched its intraday high the previous session. For the four-day period covered in this report, the Dow added 377 pts. to close at 17,039, the S&P 500 gained 37 pts. to finish at 1,992, the Nasdaq moved ahead 68 pts. to end at 4,532 and the TSX rose 252 pts. to settle at 15,556.

Our Recommendations

Despite strong Q2 earnings, various risks warrant higher than average cash positions in equity portfolios, in our view

Equities. Himalaya Jain, Director, Portfolio Advisory Group wrote “The not-too-hot, not-too-cold economic pace of many economies has provided the necessary cover for equity markets to rally back from a geopolitically-driven selloff at the end of July. Indeed, the combination of healthy corporate earnings, softer recent economic data and somewhat calmer geopolitical environment have proven to be optimal for equities, fixed income and hybrid securities. With US and Canadian equity markets trading at the high-end of the historical valuation range, and earnings season having ended (except for Canadian banks), short-term investor sentiment will likely be driven by the Fed’s stance on monetary policy and geopolitical hotspots. As we suggested in the last edition, softer inflation data in the US has likely bought the Fed some time before they feel pressured to initiate the rate-hike dialogue that we continue to believe is inevitable and could be a source of volatility. Until then, and assuming that the Ukraine/Russia and Iraq crises don’t flare up again, equity markets could drift modestly higher. We think the selloff in the Canadian energy sector (driven by a drop in oil and natural gas prices) has likely run its course and the sector looks attractive. Other sectors we favour include Financials, Industrials, Technology and Healthcare.”
Preferreds. Tara Quinn, Director, Portfolio Advisory Group wrote “The market has been range bound recently with low volumes. Overall, we continue to see investors search for yield and product but seem to be fixated on a 4.00% yield for investment grade credit. That threshold is difficult to come by in the market as underlying bond yields have moved lower and preferred share yields are now lower also. We encourage investors to look at the relative yield pick-up between corporate bonds and preferred shares as preferred shares are still offering an approximate +2.50% yield pickup (interest equivalent). We continue to recommend that investors build out a laddered preferred share portfolio as it exposes investors to various reset dates in different interest rate environments.”

Global Markets YTD 2014 August 22 USDGlobal Markets YTD 2014 August 22 CAD

Presidential Cycles: Whay stocks could soar from October 2014 to April 2015

08/22/14
Editor’s note: If history is any indication, the stock market is set to soar starting in October. In today’s Digest Premium, Steve Sjuggerud discusses this phenomenon… I (Steve Sjuggerud) like to go with what works in the markets…

 

The simpler the indicator, the better. The more time-tested the indicator, the better. On those two counts, not much can beat investing legend Jeremy Grantham’s Presidential Election Cycle Indicator.
In short, based on history, stocks have not had a losing year during the third year of a U.S. presidential term, as I’ll explain.
 When I first heard of this indicator, I thought it sounded a bit ridiculous – investing based on the presidential election cycle. Surely this couldn’t be useful. The truth is, if Grantham wasn’t so enthusiastic about it, I probably wouldn’t have given it a chance.
But then I crunched the numbers myself… and the results were shocking…
Using Grantham’s way of doing it, with data going back to 1932, it turned out the Election Cycle Indicator is extremely accurate… Take a look:

Year Return* % of losing years
Year 1 -0.7% 50%
Year 2 -3.3% 50%
Year 3 26.2% 5%
Year 4 6.9% 20%
* Not including dividends

The numbers in this table are just crazy…
 The conclusion is, just about all the gains in the stock market come during Year 3 of the election cycle.

The rest of the years are all basically a wash with each other… Years 1 and 2 are both losers… and Year 4 simply makes up for the losers of Years 1 and 2, plus a little bit.
Yes, Year 3′s gains are amazing. But its “win rate” is even better… It has only had one losing year since 1932 – and that was a loss of 1%. That losing year would actually be a winning year if you count dividends. So with dividends, Year 3 has had a perfect track record since 1932. It’s hard to argue with success like that.
 I tell you this because, according to Grantham’s math, the magic Year 3 is about to start
But this is August… so how can I say Year 3 is about to start? In Grantham’s version of the indicator, you start your “years” at the end of the third quarter (instead of at the end of the calendar year).
That means we’re only a few months away from the best time, historically, to own stocks. Grantham’s “Year 3″ starts soon… specifically, on October 1.
 Grantham crunched even more numbers on this indicator… and he found something interesting…
He found that, particularly in the last 50 years, nearly all of the returns in his “Year 3″ came in the first seven months… fromOctober 1 through the end of April.
Astoundingly, Grantham also found that the U.S. election cycle has similar results in Japan and Europe. When OUR election cycle is in Year 3, those foreign markets go up… a lot.
Long story short, Grantham’s Election Cycle Indicator is about to kick in. This Indicator has been flawless since 1932, when you include dividends. And according to Grantham, the majority of the profits happen in the first seven months.
So you really want to be invested in stocks from October 2014 through April 2015.
– Steve Sjuggerud
Editor’s note: Between now and the end of April 2015, Steve believes the stock market will have a big tailwind from the Fed and the election cycle. But what happens next? On Saturday, August 23, he will share his predictions at the S&A Conference Series event in Los Angeles.

Market Watch: Global Update

08/15/14

Growth worries reawaken

Worries about global growth were reawakened this week as key economic engines sputtered overseas. In the euro zone, growth fell to zero in Q2 with the German economy contracting 0.2% and France’s stuck in neutral. The two countries are the biggest economic drivers in the euro zone followed by Italy. With the Italian economy also contracting in Q2 there are fears the region has lost what little momentum it had in Q1. Growth, or the lack of it, was also front and centre in Japan as its economy shrank 6.8% on an annualized basis in Q2. That was the biggest hit to GDP growth since the March 2011 earthquake and Tsunami. The drop was, however, largely anticipated by analysts after the national sales tax was raised from 5% to 8% April 1. In China, the central bank reported a drop in new lending causing some to fret that the recent mini-stimulus efforts undertaken by the second-largest economy may be waning. Turning to the US, the only notable economic releases were retail sales Wednesday and jobless claims Thursday. Both modestly disappointed as retail sales excluding autos moved up 0.1% in July from June versus expectations of a 0.4% rise. Jobless claims, meantime, rose by 21,000 to 311,000 for the week ending Aug. 9; a rise to 295,000 had been expected. Finally, and on a more positive note, geopolitical tensions remained largely contained this week with no new flare-ups.

Markets

Stocks find their way

Despite the less-than-inspiring growth news, North American stocks found their way with major indexes advancing over the four-day period covered in this report. The Dow moved ahead 160 pts. to finish at 16,713, the S&P 500 added 24 pts. to close at 1,955, the Nasdaq added 83 pts. to settle at 4,453 and the TSX rounded out the good news gaining 95 pts. to end at 15,291.

Our Recommendations

Despite strong Q2 earnings, various risks warrant higher than average cash positions in equity portfolios, in our view

Equities. Warren Hastings, Associate Director, Portfolio Advisory Group wrote “Q2 corporate earnings have proven quite strong. Of the 467 companies from the S&P 500 Index that have reported Q2 results to date, 68% have reported positive earnings surprises with Q2 earnings tracking toward $30.12, indicating 11.3% YoY growth versus consensus expectations of 7%. Heading into this week, 68% of companies on the TSX had reported results according to Scotiabank GBM strategists, and results reflected strength across the board with eight of ten sectors reporting a beat. EPS of $239 implied 1% sequential and +22% YOY growth and pushed 12-month trailing EPS to $891, the highest since 2008. The Energy and Insurance sectors were notable contributors to the YOY growth. Nonetheless geopolitical tensions persist, limiting the S&P500 MTD total return to +1.4%, while the S&P/TSX total return has been negative 0.2% (returns in both cases are through August 14, 2014 in local currency terms). With equity market valuations still at the higher end of historical ranges, heightened geopolitical risks, and increasing risks to the European outlook underscored by weaker than expected economic data, we believe equities could remain volatile in the near-term. As such, we continue to hold higher than average cash balances in our equity portfolios, ranging from approximately 8%-12%.”
Fixed Income. Anthony Salvatore, CFA, Associate, Portfolio Advisory Group wrote “Bond markets rallied globally this week as market participants wagered that global central banks will keep rates lower for longer. Bond yields hit 2014 lows after a series of global economic releases sparked demand for safe haven assets. This week the Bank of England drastically cut its wage-growth forecast for the year, decreasing concerns that the bank may raise interest rates sooner than forecast. In Asia, Japan reported that GDP shrank 6.8% on an annualized basis in the April-June quarter while in China, growth in new lending declined sharply in July and housing sales fell by more than 10% in the first seven months of the year. On Thursday, a report out of Germany showed Q2 GDP contracted more than expected. In the US, initial jobless claims printed below expectations at 311k (295k consensus expectation) while retail sales missed expectations for the third straight month in a row. These developments caused bond markets to rally globally as investors wagered that central banks will keep rates lower for longer.”

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