The Wrap Up – First Quarter Summary
by Kevin Anseeuw on 04.12.2017
The Wrap Up – First Quarter Summary
March 31st ended one of the most interesting, exciting quarters in recent times. A new American President was sworn-in in January, he addressed Congress in February, markets continued to surge in the US, and in mid-March a US interest rate increase preceded the federal budget a week later in Canada.
Despite strong performance in the US in the first quarter of 2017, the Canadian market, defined by the TSX index, has lagged. The TSX Composite Index finished the first quarter in 83rd place among global markets at 1.70%. That being said, most of the portfolios at Harbourfront faired better than the TSX due to the strategic positioning of our asset allocation model.
While President Trump was being sworn-in last January, there was some positive news from the Canadian economy as it continued its recent trade surplus, added over 15,000 jobs, and lowered its unemployment rate.
The markets moved along in February and March began with strong results after the release of positive fourth quarter results by the major Canadian banks (TD, Royal, Scotia, Bank of Montreal and CIBC). Unfortunately for our snowbird clients, the expectation that US interest rates will rise along with falling oil prices negatively affected the Canadian dollar. In Canada, interest rate changes were much less certain than those in the US, with Stephen Poloz, Governor of the Bank of Canada, not willing to indicate his intentions.
The Canadian federal budget was released on Wednesday, March 22nd and had a limited impact on Canadian markets since it didn’t address immediate actions, but focused on maintaining plans and investments already in-place while looking towards long-term investments that improve long-term economic viability.
In the United States over the first quarter, President Trump’s effectiveness and ability to positively affect the economy and the stock markets came into question as his promise to replace Obamacare failed. Trump and the Republican-controlled Congress had their ability to reduce taxes, reduce spending and enliven the economy brought into doubt by this outcome. Trump also formally approved the Keystone XL pipeline, and then seemed surprised that Nebraska must still approve the pipeline, signalling a lack of understanding of political processes to his critics. Lastly, the potential renegotiation of the North American Free Trade Agreement (NAFTA) threatens to undo some of the potential gains of the Canada Europe Trade Agreement (CETA). However, under his tenure financial markets have continued to perform well, so time will tell what the longer-term effects of his presidency will be.
As predicted and as indicated by the Federal Reserve itself, the Fed raised its benchmark interest rate by one-quarter of a percentage point last Wednesday. The rate now falls in the range between 0.75% and 1%. Fed Chair, Janet Yellen, indicated that two more rate hikes are expected in 2017. Rate increases are based on the Federal Reserve’s belief that the US economy is healthy enough to withstand the slight negative nudge of a rate increase. Two more increases have been suggested by Yellen to temper inflation and economic growth should President Trump’s infrastructure reconstruction occur. The measured approach to raise US rates by small amounts frequently, as stated by Yellen, provides time for Canadian central bankers to respond slowly and thoughtfully.
As I was driving through southern Manitoba last week, I saw a home (or should I say the roof of a home) on the horizon. It was surrounded by a massive dyke that was built to keep flood waters out. I was thinking how the sunset and prairie views must be blocked by this huge grassy mound and how unpleasant that might be. Then the next day when I was heading home, flood water had made it all the way to the dyke and the home was surrounded by a lake. Suddenly the beauty of that dyke appeared to me – in challenging times, I am sure that the homeowners feel blessed to have a view of a dyke protecting their possessions and loved ones rather than a little extra piece of the open sky.
At Harbourfront Wealth Management, we recognize that we are in interesting financial times and, much like the dyke protecting the home from flood waters, we know that protecting your capital is important to you and remains our primary focus. Last year there were strong gains in the US market and the Canadian market recovered from its lows the previous year. However, the fixed income market, which adds stability to portfolios, did not fare so well and unfortunately pulled down overall returns. Although the fixed income market has produced less than stellar returns, they are a necessity of proper asset allocation and everyone loves them when we experience a market downturn because they typically hold their value and appreciate during these times.
Have a great long weekend,
Kevin
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