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November Newsletter: Spring Forward, Fall Back?

Fall back?  Those who crave an extra hour’s sleep welcomed turning back the clocks recently to standard time.  For others, darkness falling when the clock strikes an hour earlier in the afternoon is depressing, but it does get one out of doing yardwork after work ;o)

For the stock market, it’s more about springing forward as it enters what’s historically the best six months of the year, with the major averages already at or close to historic highs.  That’s with a trade war hitting global commerce and an impeachment drama hanging over Washington.  It’s also in the light of a looming U.S. election which is typically positive for the equity markets but certain to be hugely divisive.  Call it prosperity without harmony.

Looking at the U.S. equity markets performance through the year’s first 10 months, the S&P posted a total return (including dividends) of 23.16%; the Nasdaq, 26.06%; and the Dow, 18.19%.  The year-to-date numbers are flattered by timing because the equity markets bottomed around the end of 2018. On a 12-month basis, the S&P’s return is substantially lower, but still impressive, at 14.22%, along with the Nasdaq’s 14.77% and the Dow’s 10.32%.  By comparison, the TSX YTD total 12 month return is about 14%.

That’s a product of an economy and earnings that are still growing albeit more moderately. 

If there’s a fly in the ointment (and there always is), it’s that so much of the market’s gains and have been concentrated in mega cap technology stocks.  XLK for example, the US Technology ETF which holds the likes of Apple and Google is up 36% YTD.  That said, breadth—the number of advancing stocks versus decliners—on the New York Stock Exchange also is at a peak, indicating relatively broad participation in the major indexes’ march to record highs.

The markets stand at these levels as they head into their strongest seasonal period, based on history, according to the Stock Trader’s Almanac. The publication’s technical indicators actually marked Oct. 11 as the start of that season this. Having said that “a tree doesn’t grow to the sky”. Our own view is that gains from here look positive but subdued and given the relative strength of the U.S. economy we might suggest a low likelihood of some sort of market meltdown.  Our position going forward and into the first quarter of next year is to proceed with caution and continue to marginally reduce the risk assets in favour of more conservative alternatives.