At the beginning of the year we stated that our outlook for 2014 remains optimistic. Despite the negativity we have seen this week, our outlook has not wavered.
During the month of January you frequently hear references in the media to the “January effect”, this is a market trading anomaly that has been a fairly accurate (80%) hindsight indicator over the past 30 years. We say hindsight indicator because you don’t know if it was accurate or not until the end of the year, but it can be a useful heurism or “rule of thumb”.
January still has a week to go, but thus far the Dow Jones is actually down 3% year to date, while the S&P TSX is up about a half of a percentage point as of today. Here are a few reasons why our outlook remains optimistic for both Canada and the United States, despite what looks to be a possible negative month for the US Capital markets.
Last week we wrote, “the strong capital market appreciation in the US markets was not really supported by the much weaker underlying economic data, as the market had surged well ahead of what company earnings growth was actually reflecting.” We still think this is true, and given the broad market pullback we have seen this week, this is the opportunity we have been waiting for. Companies that deliver strong revenue and earnings growth, such as Microsoft, JP Morgan, General Electric and Procter & Gamble should be expected to appreciate, while those that do not should not.
We have been waiting for this general market pullback and are now seeing the broad market decline back to stronger fundamental levels. We have greater conviction of the underlying company strength in order to make long term investments. The weaker than expected manufacturing data out of China, likely another tapering announcement from the US Federal Reserve next week, and Treasury Secretary Lew renewing the US Debt Ceiling fear in February, has provided what we believe to be enough general fear that the capital markets are now retreating to more fundamentally supported levels. We are certainly not predicting, nor expecting, a recession or imminent bear market for the US, but rather a more normal and healthy correction.
We had been cautious on “piling into” the US capital markets as it has been 142 days since the last 5% market correction. It has also been 589 days since the last 10% correction in the S&P 500, and since 1957 on average, corrections of approximately 10% have occured every 357 days. We had modestly added some US holdings in the September period, when we last saw a 5% decline, but as we closed out 2013 in what looked to be a very over extended rally we were cautious.
The “January effect” as a general rule of thumb is also applicable on the upside, thus our continued optimism towards owning the strong economic sectors within Canada. The S&P TSX has had a positive start to the year, with continued strength being displayed in the Industrial, Manufacturing and Machinery, Financial Services and Energy sectors. It is our belief that these sectors will potentialy see strong benefits from the decline in the Canadian Dollar.
Last week the Bank of Canada Governor, Stephen Poloz, announced that growth improved throughout the second half of 2013 and that real GDP growth is projected to increase from its current level to approximately 2.5% for both 2014 and 2015. This projection along with our Dollar at 90 cent equivalence to the US Dollar should be expected to boost exports and, in turn, business confidence and capital investment.
Increasing economic growth projections for Canada, stronger U.S. demand, as well as a lower Canadian dollar, suggest to us that Canadian Industrial, Financial Service, Energy and Manufacturing companies should be owned. In Canada we have frequently mentioned companies such as Bank of Nova Scotia, Manulife, Finning, Crescent Point among some others that are the type companies that we would look to own.
Brian Belski, chief strategist at Bank of Montreal echoed similar comments in an interview on BNN this week, stating that Canadian banks and insurers should benefit from beefed up wealth-management activity; Canadian industrial companies including engineering firms and railroads are set to benefit from a renaissance in U.S. manufacturing; the lower Canadian Dollar will also be a boost for Canadian companies selling their products abroad.
For those of you who are history buffs, or just like computers, it was 30 years ago today that Steve Jobs introduced the Apple Macintosh computer and revloutionized the personal computing world. Yes it was an odd, some say ugly, looking off-white box, but just think of where your life would be today without being able to use that little mouse.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group