By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: May 3, 2019

May 5, 2019 | 12:54 PM

Big Picture

Fed Holds Steady, Downplays Low Inflation; Canadian Economy Shrinks

The U.S. Federal Reserve held its benchmark interest rate steady on Wednesday, with officials pointing to a generally healthy economy while also noting a slowdown in household spending and business investment during Q1. While GDP rose at a betterthan-expected 3.2% in Q1, many economists cautioned that some of the contributions from trade and inventories may be shortlived. Fed Chairman Jerome Powell downplayed concerns that recent soft inflation might hint at broader economic weakness, noting that officials “don’t see a strong case for moving rates in either direction,” effectively dampening any hopes for a rate cut in the next few months. While strong U.S. jobs numbers helped boost market sentiment early Wednesday, weaker-than-expected manufacturing data weighed on North American markets. By day’s end, the Dow closed down 163 points, while the TSX dropped 78 points. Thursday was a down day as well, as Wall and Bay streets were dragged down by plummeting oil prices, which declined 3% in light of surging stockpiles. Also weighing on Canadian sentiment was Tuesday’s news that the Canadian economy unexpectedly shrank 0.1% in February. The month’s poor weather throughout much of the country disrupted transportation and hampered both factory output and export numbers. Looking to Asia, Chinese manufacturing activity weakened in April, suggesting the world’s second-largest economy has yet to fully rebound from its recent weak spell. Finally, while global numbers continue to paint a mixed picture, all the conflicting data hasn’t slowed down U.S. consumer spending, which surged 0.9% in March, the biggest jump in nearly a decade.

Markets

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Markets React to Fed News, Surging Oil Supplies

For the four days covered in this report, the Dow dropped 235 points to close at 26,308, the S&P 500 shed 22 points to settle at 2,918, while the tech-heavy Nasdaq declined 109 points to close at 8,037. In Canada, falling oil prices and downbeat economic data weighed on the TSX, as Canada’s major index lost 203 points to end at 16,410.

Equities/Strategy

Strategy

Recession risk building, but neutral equity positioning still warranted. Our revamped U.S. recession indicator is based on eleven weighted macroeconomic factors that measure economic output, consumer sentiment, and housing, labour and financial market conditions. The indicator is intended to signal when investors should reduce equity market exposure ahead of a potential recession. A reading below 100% indicates investors should have a neutral or overweight allocation to equities relative to our long-term strategic asset allocation framework. We would recommend reducing equity exposure as the indicator approaches 100%. Investing in the S&P 500 Index based on the indicator would have yielded a ~14% annualized return since 1973 versus ~10% were one to have remained fully invested the entire time. Importantly, we do not expect a U.S. recession in 2019. Our model suggests that recession risk has increased since the beginning of the year amid declining investor sentiment and waning growth and inflation expectations. However, more accommodative financial conditions, central bank data dependency, and Chinese stimulus measures should result in reflation and a modest economic growth acceleration later this year. Diminished geopolitical uncertainty should also help

(Bill Curry)

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