Dovish Fed Remarks Help Spark Equity Rally
The Dow climbed more than 600 points Wednesday, erasing its November losses, after Fed Chair Jerome Powell’s remarks quelled investor fears over the prospect of aggressive interest rate hikes. Led by the tech and health-care sectors, stocks climbed almost immediately after Powell’s comments. The Dow added 618 points, the Nasdaq surged 209 points, while the S&P rose 62 points. Wednesday’s rally marked the first time since November 1 that the benchmarks climbed in three consecutive sessions. Powell’s apparently dovish tone helped the TSX as well, which surged 227 points on Wednesday, and the loonie, which rallied against its U.S. counterpart, rebounding from an earlier five-month low. Gains for the loonie came despite a 13-month low for the price of oil.
In trading Thursday, oil recovered from earlier losses to move above $50 a barrel, after reports that Russia and OPEC are likely to cut production. That’s welcome news for Canada, as plummeting oil prices (including Canadian heavy crude) have weighed on the economy, reducing expectations for a January rate hike by the Bank of Canada. In the U.S., new home sales slid sharply to a 31-month low in October as higher mortgage rates and rising construction costs created major headwinds for home builders. The 8.9% decline marked the fifth month of declines this year and was the steepest since December 2017.
Meanwhile, Commerce Department figures released Wednesday show that overseas profit growth at U.S. companies is slowing – a new sign of how the waning global economy is finally being felt in the U.S. In the third quarter, U.S. profits overseas rose 7% from a year earlier, a drop from 13.7% in Q2 and Q1’s 15.6%. Finally, all eyes will be on this weekend’s G20 Summit in Buenos Aires to see if the U.S. and China can make any progress in their ongoing trade war. Earlier in the week, President Trump threatened to move ahead with additional tariffs on Chinese goods.
N.A. Markets Recover Some Ground
For the four days covered in this report, the Dow surged 1,053 points to close at 25,339, the S&P 500 added 105 points to settle at 2,738, while the tech-heavy Nasdaq gained 334 points to close at 7,273. In Canada, the TSX was up 183 points to end at 15,194.
We continue to recommend modest overweight exposure to equities.
Our geographic preference for U.S. securities is supported by strong corporate earnings growth, which has been driven by tax cuts, deregulation, and healthy consumer spending. The prospect of near-term Canadian equity market outperformance improved after Canada agreed to sign onto the United States-Mexico-Canada Agreement, the renegotiated trade pact among the three nations. Longer-term, however, the country (and its equity market) will need to contend with soft Canadian heavy oil prices and the adverse effect these tend to have on global capital inflows. We do not deny European, Japanese and emerging markets equities could outperform in the near-term on the back of a possible year-end bounce from depressed levels, but political uncertainties and a lack of significant growth catalysts keep us from allocating more meaningfully to these regions at this time.
(Big Picture - Bill Curry)
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