February 23, 2018
Weekly Market Comment
Some Olympic quotes in honour of the current winter games (including one for our curling fans, in jest of course!)
“To uncover your true potential you must first find your own limits, and then you have to have the courage to blow past them.” —Picabo Street, gold-medal skier
“Focus, discipline, hard work, goal setting and, of course, the thrill of finally achieving your goals. These are all lessons in life.” —Kristi Yamaguchi, gold-medal figure skater
“If you think you’re done, you always have at least 40 percent more.” —Lauren Crandall, Olympic field hockey player
“Curling is not a sport. I called my grandmother and told her she could win a gold medal because they have dusting in the Olympics now.” – Charles Barkley, former NBA basketball star
The TSX Composite advanced by 1.2% while the S&P 500 rose by 0.6%.
This shortened trading week has been relatively calm for most investors. The United States economy is chugging along. Economic indicators released this week describe a broadly expanding economy. Leading indicators (used to gauge where the economy could be headed next) did not deliver signs of imminent trouble.
The minutes of the Federal Open Market Committee’s meeting that took place on January 30-31 were released this week. Investors follow them to understand how aggressively the Fed is going to increase interest rates in the US. The minutes outlined an optimistic view of the economy and raised growth projections. As a result, the committee said that interest rates should continue going up. Signs that the US economy remains vibrant, stimulated by the recent tax cuts and featuring an already tight labor market (initial jobless claims declined again) were the primary reasons. Rising interest rates, along with low inventories and rising prices, caused January US housing sales to experience the sharpest annual drop in in over three years. While the real estate market in the US remains healthy, higher interest rates will likely continue to drag on demand.
Meanwhile, Canadians look forward to seeing what changes the next federal budget, scheduled for release on February 27, will usher in. At the provincial level, things are going in the direction that the NDP outlined in their platform. The BC budget released this week includes $5.2 billion in new spending and $5.5 billion in new taxes. The largest new source of revenue for the government will be the new employer health tax. BC expects to collect $4.2 billion over the next three years, offset by the $1.7-billion elimination of the Medical Services Plan (MSP) payments by January 2020. Businesses whose payroll is less than $500,000 will be exempt from the new tax. The budget also introduced several new taxes in an attempt to curb real estate speculation blamed for the ongoing housing crisis. It will be interesting to see how higher interest rates, new mortgage rules and now higher real estate related taxes will affect the BC housing market. BC business owners are showing some concern now that they have this new payroll tax and a higher carbon tax on top of the recently increased minimum wage. While businesses will be footing most of the bill, young families and students will be among the budget’s biggest beneficiaries.
On the commodity front, oil prices are down about 3% from the start of the year despite sitting near two-week highs, as rising US oil output and exports countered OPEC’s output curbs and a dip in Libyan production. Prices recouped some losses following the shutdown of the El Feel oilfield in Libya producing 70,000 bpd. Production in the OPEC member has been running at about 1 million barrels per day although it remains volatile due to unrest. Yesterday, the US Energy Information Administration (EIA) reported that crude inventories fell unexpectedly by 1.6 million barrels with low import figures contributing to the decline. Countering the drop in inventories, EIA reported weekly US oil production was steady at 10.27 mln bpd, a record level if confirmed by monthly figures.
In an interesting announcement, Apple, one of the world’s largest end users of cobalt, is in talks to buy long-term supplies of the material directly from miners in a move to ensure it will have enough of the key battery ingredient. Fears of a shortage have been driven by the electric vehicle boom.
The market continues to favour “growth” stocks, and this week we took advantage of this momentum by adding technology company Adobe to several of our discretionary portfolios. Despite its sector allegiance, it is stable and profitable, fitting our risk-aware investment style. One stock that does not have these features, however, is Snap, Inc (the company that runs Snapchat). This week, it served as a reminder that “unicorns” (startups valued at $1 billion or more) can deliver quite a roller coaster for the brave souls investing in them. Snap shares fell by 6%, wiping out over one billion dollars’ worth of market capitalization, after Kylie Jenner, a reality TV celebrity, tweeted that she doesn’t quite like the newly redesigned Snapchat application, Snap’s main source of revenue. Ms. Jenner’s tweet landed amid a relatively calm market and reminded us that risk can come from anywhere. However, having the right perspective is key. Kylie was once quoted “Every time I start to get worked up over something, I just think to myself, ‘Is this really going to matter in my life tomorrow, in an hour, in a year?’ You just can’t get stressed about the little things ‘cause it’s just not worth it at the end of the day.” We are sure that this bit of advice from Ms. Jenner would be well-received.
Musing Beyond the Markets
Speaking of things receiving acclaim, David Letterman’s new show is a prime example.
He is with Netflix now, and hosting a mini-series called “My Next Guest Needs No Introduction with David Letterman.”
The show features interviews with the likes of Barack Obama, George Clooney, Malala Yousafzai, and others. The friendly, low-key tone of the show feels refreshing amid the hostility and polarization that seems to permeate mass media these days. If you’re looking for a quality escape this week but don’t want to shovel off the driveway, The Crown, an acclaimed historical drama, is a great option.
Word of the Week, Canadian Ice Hockey Edition
puck (noun)—a mischievous or evil sprite. “But in the night and in the moon, it takes a spirit, ghost or puck, to walk its field.”