Oct 2019 Market Review

Politics Reign Supreme in October

Hello Everyone, 

This month brought us some interesting news from Canada, as Prime Minister Justin Trudeau won the Federal election to return for a second term as the leader of Canada. There has also been some progress in the US/China trade talks and the US Federal Reserve has decided to cut rates once again. We also came closer than ever to a BREXIT deal that eventually was shut down, but it shows there is at least some progress being made. Many of the major headlines have either concluded, are in the process of being resolved or shine a positive light towards the markets. This should give investors more predictability going forward which should drive markets higher.

Source: Yahoo Finance

JT is back at the helm, no Justin Timberlake has not returned to N’Sync but rather Justin Trudeau is once again our Prime Minister. This time around is a little different than 4 years ago when he entered his first term with a “majority” government. The Liberals won a “minority” government this time around, which means that in order to get things done, they will need the votes of other groups for bills to pass. The Conservatives and BLOC Quebecois won a stronger vote, while the NDP had a higher popular vote, actually lost seats in the House. Reviewing the seats won and the platforms of each party during the election, we can fetch a guess to what the future may look like in Canada.

Carbon Tax: Liberals, NDP and BLOC all wanted to keep the Carbon Tax, so this will most likely remain. While many argued the way it was being enforced (taxed) it’s unlikely it will change.

Fossil Fuel Subsidies: Liberals and NDP wanted to remove the subsidies, but Conservatives were adamant about keeping them.

Pipelines: Liberals and Conservatives are in support of the pipelines, but this will be a continued debate going forward given the cost and the impact to communities and the environment.

Single-Use Plastics, Land Conservation, and Electric Vehicles: All major talking points with many parties in support of becoming more “green” going forward. Expect progress in all of these platforms.

Pharmacare: Always a hot topic Liberals and NDP wanted to introduce a pharmacare plan that was broader than the current system, but it will be quite costly.

Tax Cut: Liberals and Conservatives were in favor of tax cuts, especially for the middle class, Liberals said this is one of the first things on their list to complete.

Meanwhile, in the US, the impeachment process for President Donald Trump has moved forward to a vote in the House of Representatives (which is mostly Democrats) and if passed will move to the Senate (which is mostly Republicans). While causing many headlines, unless further information is provided it is unlikely to make it passed the Senate and will most likely end there. I think we prefer the Canadian multi-party system where good ideas can make it through if shared by more than one party.

In terms of global markets, the two largest contributing factors are becoming more positive. Firstly, the US Federal Reserve cut rates for a third time this year. This has brought the rate from 2.50% down to 1.75%, which is very significant, as many companies around the world borrowing rates are based on this Fed rate. While this may not seem like a lot, many companies with high levels of debt (which is a lot) just received a 30% cost cut. This could turn a company that is struggling to pay its bills to a very profitable company, which reduces the chances of that company cutting costs, which reduces the chances of the company cutting jobs which reduces the chances of a recession. This reduction in cost also helps companies getting started, which may add a boost to the economy. Secondly, progress has been made on the US/China trade front, with both sides claiming at least part of the deal has been completed. This could spark further development in global trade, especially between the world’s two largest economies which are already so intertwined. This may also remove some of the imposed tariffs on each side, further reducing costs incurred by companies on both sides. With the progress made, it is not difficult to see how these developments are generally positive for the markets.

The narrative that has many investors spooked over the past year, is the talk of a global slowdown. This is very different from the tune near the end of 2017 where “global synchronized growth” was the story. It has been about 1 year (September 2018) that the global slowdown was the hot topic and fears of a recession followed. While we are not out of the weeds the market is now pointing to a recovery from these levels. US GDP peaked in Q2 in 2018 at 3.5% to 2.9% in Q3 before hitting 1.1%, 3.1%, 2.0% and most recently 1.9% in the following quarters. The US has definitely been going through a slowdown, going from the 3% range to 2% range, which is a 33% reduction in production. With lower rates and a trade deal, production could once again rise. In China, they have displayed the same regression, moving GDP in the high 6% range to 6% flat, with whispers of going below 6% in the coming quarter. The rest of the globe has experienced similar GDP declines as the global slowdown has taken hold. It is important to note, that during this slowdown, that unemployment rates in the respective areas, has actually been declining. Meaning businesses have managed to keep people employed regardless of the rhetoric, which has put the recession talk at bay.

The market has correctly predicted a global slowdown which we have felt over the past year, but recently the market has been becoming more optimistic that GDP might be headed higher going into next year as it approaches new highs.

Every quarter, companies report their financial results and the most recent earnings have caused reason for optimism. We look to this as a strong gauge to the health of an economy, as the first people to know if a business will fail or succeed is the business itself. Many companies have spoken very positively regarding 2020 and point to continued expansion in the year to come. This gives us more confidence going into the end of the year for the markets, as well into 2020. This growth should push up commodity and wage prices as we have been predicting all year, which we have seen the start off with gold, silver, and lumber all increasing. We have also seen some of the undervalued growth companies get a lift as of late.

With all that said, our investment thesis remains the same with a balanced approach (Public vs. Private Investments). We believe every investor should hold a diversified mix of Equities, Alternatives and Fixed Income just like the pension funds and endowment funds do. At the time of writing this, there are still a lot of great opportunities, even at these levels in equity markets, but investors should be much more selective going forward. For more information, please do not hesitate to contact us.

Sincerely,

Konrad, Justin, and Merriel

More articles and information is available at www.lkwealth.ca

Content Sources: Bloomberg, Trading Economics, Yahoo Finance, Reuters

Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.

Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

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These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.