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Market Watch- Nov. 16, 2018

Nov 16, 2018 | 11:37 AM

U.S. Markets Get Mid-Term Bounce; Oil Enters Bear Territory

The Dow jumped nearly 550 points Wednesday as U.S. stocks extended a recent rebound, after midterm elections delivered a divided Congress with the Democrats taking the House of Representatives and Republicans adding to their majority in the Senate. In Wednesday’s session, the Dow rose 2.1%, while the tech-heavy Nasdaq climbed 2.6%. The S&P 500 also added 2.1% – the largest postelection gain for the index since 1982. Trading was largely mixed Thursday as investors contemplated the growing divide between the two parties, the exit of Attorney General Jeff Sessions and President Trump’s confrontational press conference following the midterms. Meanwhile, the Fed held short-term interest rates steady Thursday and offered a largely positive assessment of the U.S. economy, suggesting another rate increase is likely in December. U.S. oil prices closed in bear-market territory Thursday, with prices dropping for a ninth straight session on concerns that a global supply surplus that could overwhelm demand. While it seemed like a trade agreement between Canada, the U.S. and Mexico was a done deal, securing congressional approval of the reworked NAFTA agreement, aka USMCA, may become more difficult with a divided Congress. Trade analysts now say getting the agreement through Congress next year may be unlikely. Somewhat surprisingly, Chinese exports surged last month, despite many economists’ expectations for a slowdown resulting from the trade war with the U.S. Demand for Chinese goods grew in developed and developing markets, according to customs data released Thursday. Despite being the first full month covered by all U.S. tariffs on China, October saw exports to the U.S. rise 13% versus a year ago, while imports from the U.S. fell nearly 2%. The latest numbers suggests China maybe benefitting from a weaker yuan and unexpectedly healthy global demand. 

(Big Picture – by Bill Curry)

 

Markets

North American Markets Bounce Back

For the four days covered in this report, the Dow climbed 920 points to close at 26,191, the S&P 500 added 84 points to settle at 2,807, while the tech-heavy Nasdaq gained 174 points to close at 7,531. In Canada, the TSX was up 239 points to end at 15,358.

 

Equities/Strategy

Strategy

Our tactical asset allocation model continues to call for overweight exposure to equities and underweight exposure to fixed income relative to our strategic asset allocation model. Consistent with late-stage business cycle dynamics, we expect bouts of financial market volatility to occur more frequently over the coming year. Accordingly, we recommend exposure to alternative assets, which typically exhibit low correlation to traditional asset classes (such as bonds and equities) and can help investors reduce portfolio volatility, improve portfolio diversification, and enhance risk-adjusted return potential. We intend to maintain our asset allocation recommendations so long as our recession probability indicator remains at or around current low levels. On account of heightened global macroeconomic and geopolitical risks, we continue to stress the importance of diversification across asset classes and geographies. At present, we favour developed market (DM) over EM exposure owing to EM countries’ relatively higher indebtedness and the debt servicing challenge this could present in a rising interest rate environment. EM economies are also susceptible to capital flight in view of the strong U.S. dollar. We prefer to gain EM exposure through wellcapitalized multinationals domiciled in advanced economies. Nevertheless, we acknowledge the uniqueness of emerging markets and would consider opportunistically capitalizing on potential weakness in specific regions.

 

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