By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: Nov. 29

Nov 29, 2019 | 2:47 PM

Big Picture

U.S. Markets Hit New Highs Over Trade Optimism, Strong Data

Wall Street’s big three indexes closed at record levels for a third straight day on Wednesday following positive trade deal news and data that showed U.S. economic growth had accelerated in Q3, along with consumer spending. Third-quarter GDP was revised up to 2.1% from 1.9%, while durable-goods orders in October surprised to the upside. Jobless claims for the prior week were also down; however, U.S. consumer confidence fell for a fourth straight month, even though the index remains at a high level, according to the Conference Board. In Canada, the TSX was up 65 points on Wednesday, with 10 of the 11 major sectors gaining.

While it’s been a strong week for U.S. markets, S&P 500 companies are expected to earn less in Q4 versus last year’s Q4, which would mark a second straight quarterly profit decline. Two straight quarters of year-over-year declines would result in an earnings recession, which hasn’t happened since the period from July 2015 through June 2016, when markets showed persistent weakness.

The loonie strengthened against the greenback on Tuesday, as optimism for a phase-one trade deal between the U.S. and China grew, and a tentative deal was reached to end the CN railway strike. The loonie held steady Wednesday but surrendered a bit of ground Thursday.

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While investor sentiment has definitely picked up this week, a trade deal between the world’s two superpowers took a hit Thursday after President Trump signed a U.S. bill into law backing Hong Kong’s protesters. The move has provoked China’s wrath and once again puts a trade deal in jeopardy.

Markets

N.A. Markets Continue Their Climb

It was a thinly traded Thanksgiving week in the U.S., with markets there closed on Thursday. For the four days covered in this report, the Dow surged 288 points to close at 28,164, the S&P 500 added 44 points to settle at 3,154, while the tech-heavy Nasdaq climbed 185 points to close at 8,705. In Canada, the TSX rose 160 points to end at 17,115.

Equities/Strategy

Equities

Margin expansion will remain challenged in 2020. U.S. companies have capitalized on the significant decline in global interest rates in 2019 by extending debt maturities, benefitting from reduced financing costs. On average, debt maturities and coupons for S&P 500 Index constituents approximate 8.9 years and 3.9%. With the arrival of 2020, we expect cost push inflation to return. Inflation decelerated in economies operating near their full potential in 2018 and 2019 as slowing growth reintroduced slack into the global economy. Looking forward, strong labour markets and rising input prices may result in higher cost push inflation. Accordingly, highly indebted companies, and those closely tied to the economic cycle, with narrow margins may encounter difficulties sustaining profit margins amidst slower growth. Regionally, U.S. equities are expected to demonstrate relative stability given the less cyclical composition of the equity indices versus other developed or emerging markets. Although we anticipate that long-term equity market returns will outpace some other asset classes, we expect volatility to increase as the global economy matures. Our view underscores the importance of focusing on risk-adjusted versus total return expectations. A high-quality bias, emphasizing companies with strong balance sheets, sustainable competitive advantages, and business models that are not overly sensitive to the economic cycle remains prudent.

(Bill Curry)

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