Market Review: September 2016

Oil Increase Trump’s the Market

This month felt like I went to a water park, but instead of excitement, the only thing that was open was a lazy river as not much happened in the way of volatility in the global markets this month, in a traditionally underperforming September. Canada’s economy rebounded recently as exporters saw improving sales and our trade deficit decreased again for the 2nd consecutive month. But to highlight, Canada is still suffering from a poor economy for most of the year as employment has been the decline. The biggest news has to be OPEC’s decision to finally step in and cut production. We won’t know this for sure until November 30th when OPEC reconvenes and discusses all the details. Lastly, the Presidential debates occurred with the majority of critics stating that Hillary won the first debate with ease, often staying in line with her prepared message and just letting Trump derail himself. The memorable line had to be from Hillary, when she criticized Trumps economic plan by calling it “Trumped-Up Trickle Down Economics” in which she stated would only help the rich. Saturday Night Live had a great skit of this debate and we highly recommend that you watch it as Alec Baldwin’s performance as Trump is spot on. At the time of writing this, it can be found here:  https://www.youtube.com/watch?v=Ukt2j4p_tv4. Looking forward, let’s hope the markets go upward smoothly and does not have Donald’s temperament which he call his “his strongest asset”.

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The most notable developments this month have been the following

Canada

‍Canada’s exports have started to do better the past 2 months and should continue to have positive momentum for the rest of the year. Until the energy sector recovers, Canada will not see any meaningful growth as it represents a sizable portion of our countries GDP. Luckily OPEC has shown signs that it will cut production in the coming months giving hope to Alberta and the rest of Canada.

• Recent well performing sectors are Basic Materials, Energy, Industrials and Telecommunications.
• The TSX Composite is up 0.8% for the month.
• Unemployment rises (back to 7% after a decrease to 6.8% in June).
• Bank of Canada holds current interest rates (no increase expected until 2018), inflation is at a 6 month low as per their statistics. Low energy prices being the main culprit for the low inflation numbers.
• Trade deficit decreased again, for the second consecutive month (great result after exports fell for 6 consecutive months earlier in the year).
• Oil politics making progress (OPEC finally decided to cut production, but details are yet to be revealed).
• Canadian dollar closed flat for the month (CAD/USD = $0.762).
• Real Estate transactions dropped in 17 of 28 domestic markets (the largest decline in Vancouver which is believed to be a result of the new foreign buyer’s tax).
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United States

‍The US continues to be the global leader in this slow growth story that is constantly being reported in the media. The Federal Reserve maintained the current lending rate as views are split on what the economy can handle. The odds are that December will have a rate hike as there is more good news than bad news coming out of the US.

• Recent well performing sectors are Utilities, Energy, Telecommunications and Technology.
• The S&P 500 remained flat at -0.1% while the Dow Jones Industrial Average was also down -0.5% for the month.
• Slow but steady growth continues (GDP growth rate remains at 1.2-1.3%).
• Rates did not get raised, but Federal Reserve officials remain mostly hawkish (63% chance of rate increase in December).
• Job growth continues its positive trend (Jobless claims decreasing throughout 2016, Employment rate continues to increase).
• New homes sales continue to surprise (609k in August, up from the low of 270k in Feb 2011) *reports delayed one month.‍
• The US Presidential debate happened on Sept 26th (as it shed some light on which candidates investors do not want, as markets rallied right after the results that showed Clinton edging ahead).
• Healthcare still under-performing (largely due to uncertainty about how Clinton will reform the healthcare industry if she wins the election).
• Technology is in merger/acquisition mode (this year started with Microsoft’s acquisition of LinkedIn and now potential deals with Twitter being mentioned to be a target of Salesforce and Netflix rumoured to be on Disney’s wish list).

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Global

‍With BREXIT on the back burner for now, Europe and Britain focus on stabilizing their up and down economies. The stress of no growth and high debt levels is beginning to take its toll and Angela Merkel stated that if there was a failing bank the EU would not attempt to bail them out. This comes in the wake of Deutsche Bank’s large US fine for their part in the 2008 financial crisis.

Japan has decided to implement new measures to fight deflation rather than getting deeper into negative interest rates and stimulus packages. This is a welcomed sign and could be a sign of things to come as governments are getting more creative to simulate growth. China and India continue to grow at a slow rate than in the past but this is expected as they transition their economies.

• Eurozone unemployment stabilizes at 10.1%, (down from 10.7% earlier in the year).
• European Central Bank (ECB) holds rates, remains at 0% expected to remain at these levels.
• ECB announced no further plans for any further stimulus (as the existing program expires on March 2017).
• BREXIT discussions continue to move along (there is no outline of what BREXIT will actually look like).
• Positive German manufacturing PMI (54.3 vs. 53.1 in the previous month).
• China’s inflation is at a 10 month low (1.3% for the month of August) *delayed one month.‍
• China’s imports increased (the first time in 22 months as China attempts to steer the economy towards consumption).
• Japan’s jobless rate increased to 3.1% (first increase since 2015, but still trending downward).
• Bank of Japan left its overnight lending rate unchanged (remained in negative territory at -0.1%, but stated it will introduce new measures to fight deflation).
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Eye on the month ahead

• ‍‍Biggest question: The next meeting for the Federal Reserve is November 1st and 2nd, while the highest probability of the FED raising rate is in December which are scheduled Dec 13th to 14th.
• US Presidential Elections are on November 8th, with plenty of time for each candidate to make their mark, but which one will have the most positive impact?
• How is the European Union going to kick start their economies with no renewal of the current stimulus package?
• Will OPEC make good on their word and cut production in the coming months? Their meeting on November 30th should provide more insight.
• Can housing prices continue to soar in the Toronto and Vancouver areas despite new mortgage rules for individuals putting less than 20% down? – —- Can the 15% foreign tax in Vancouver have a major impact and will the new CRA rules to report price information when selling a principle residence affect those that house flip for a living in order to avoid tax?

We continue to believe that a globally balanced portfolio is the best approach. Reducing volatility and staying away from overvalued companies will be the formula for success for the remainder of the year. We still favour equity investments or fixed income as we are heading into an interest rate increasing environment.

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Finance 101 – Education

What is the Trickle Down Theory

In the recent Presidential debates you may have heard Donald Trump talk about cutting taxes for corporations to help spur economic growth. This theory is called the Trickle-Down Theory or as Hillary Clinton likes to put it “Trumped-Up Trickle Down Economics”. There is a case that can be made if it works or would it just help out the top 1%. Let’s take a look.

The theory is that creating tax breaks for income and capital gains and other financial benefits for large businesses, investors and entrepreneurs will help stimulate the economy. It assumes that all members of society benefit from growth; and that people with resources and the skills to increase productivity are most likely to provide the growth. The overall goal is that these “breaks” help to increase investment in the economy.

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By introducing breaks and incentives at the top, what are the results the politicians are hoping for?

• ‍‍Increased jobs, as corporations can hire more workers.
• Increased wages, as they have a higher profit margin and can afford to do so.
• Lower taxes entice people to work more as they are able to keep more of what they earn.
• As people save more, those savings are used to spend and invest.
• The increase in production helps the government collect more taxes in the end.

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Conclusion

In theory, not just the rich but everyone enjoys more prosperity as the funds trickle down. The detractors say that it only benefits the rich as very little of the funds get passed along. They point to income inequality as proof that the rich are getting richer and doesn’t benefit others.

The US government and others around the world have a tough task on their hands to help spur growth in an ever slowing and ageing developed world. These nations struggle with this and therefore opportunities in emerging markets, as more new middle class earners get created every day and should bode well for their country’s growth and global companies that focus on those markets.

Economic Calendar

Best Regards,
Konrad, Justin and Merriel

Disclaimer: Echelon Wealth Partners Inc. is a member of IIROC and CIPF. This document has been prepared as a monthly market update and does not contain any recommendations for any particular investment. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any investment decision should be based on your own risk tolerance and investment objectives and reviewed with an investment advisor. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. The data used in this document is from various sources and is believed but in no way warranted to be reliable, accurate, complete and appropriate.