By Scotia Wealth Management - The Zukiwsky Group (Sponsored)

Market Watch – January 11, 2019

Jan 14, 2019 | 4:58 PM

Big Picture

Dow, S&P 500 Exit Correction Territory; TSX Extends Rally

U.S. markets registered their fifth straight session of gains on progress over U.S.-China trade talks and Fed Chair Jerome Powell’s remarks indicating the central bank’s willingness to adjust its pace of interest-rate increases if economic conditions weaken. With Thursday’s gains, both the S&P and Dow are up more than 2.5% since the start of January after a strong December jobs report last Friday and initial signs of flexibility from the Fed. Given Powell’s most recent remarks, many private economists surveyed expect the Fed will hold interest rates steady at least until June. While U.S. markets have been buoyed by the Fed, it bears noting that Powell’s new tenor is in response to signs of weakness for global growth, particularly in China. Consumer and producer prices decelerated sharply there last month, compounding the challenge for Beijing in boosting sluggish demand in a deepening economic downturn. Consumer prices rose in December at their slowest pace in six months, while producer prices increased by the lowest rate in two years. The numbers are causing deflation concerns in Beijing, with slumping prices putting downward pressure on corporate earnings and hampering companies’ ability to repay debts.

The TSX, which climbed 99 points Thursday, approached a nearly four-week high, fueled by optimism over U.S.-China trade talks, which helped boost the price of oil. While the TSX has had a solid stretch, the Bank of Canada is keeping its key interest rate unchanged in the face of a new, ominous forecast that shows Canada’s economy is slowing down fast. The central bank left its rate at 1.75% Wednesday as the country continues to grapple with lower oil prices, weaker housing activity and global growth concerns. The bank estimates its neutral rate is about 3%.

Markets

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North American Markets Register Solid Gains For the four days covered in this report, the Dow surged 569 points to close at 24,002, the S&P 500 climbed 65 points to settle at 2,597, while the tech-heavy Nasdaq jumped 247 points to close at 6,986. In Canada, the TSX was strong, gaining 476 points to end at 14,903.

Equities/Strategy

Strategy

We have updated our tactical asset class recommendations and we are reducing our equity exposure to a market weight, increasing our fixed income exposure, though we remain underweight relative to our strategic asset allocation. In equities, we maintain our overweight position to the United States and our underweight position internationally. We lowered our Canadian exposure to market weight. In fixed income, we are increasing our sovereign and investment grade fixed income weighting, which should help mitigate portfolio volatility and enhance risk-adjusted returns. Duration remains below benchmark, but has been extended in anticipation of moderating growth. In addition, we are lowering our preferred share weighting given our expectation that short-to-medium term interest rates will not increase materially.

(Bill Curry)

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