The Market Watch is back after a two-week hiatus due to business travel and other work commitments that had us away from the office the past few Fridays.
Over the past few weeks the capital markets have seen a lot of data and media commentary. Within Canada, a lot was made of the S&P/TSX reaching 15,000 to make a new high, which sounds impressive until you look at that achievement in context. The market making a new high simply means it has gotten back to where it was six years ago. I know we wouldn’t be celebrating a 0% rate of return over the last 6 years, but it is a healthy sign.
South of the border we have seen the S&P 500 extend its recent high water mark with a variety of economic data points showing continued improvement. Terry Sandven, chief equity strategist at Minneapolis based US Bank Wealth Management, in a comment to clients today noted that “earnings are rising, interest rates remain low and inflation is elevated, but not at extremes. That’s a favourable environment for equities to march higher.” We don’t disagree, but would remain cautious as we are entering summer which has historically been a period of sluggish capital markets. Thus, we are looking at various opportunities to put some of the cash balances we have suggested clients build up over the past month or two back to work over the summer months.
This week we also had the Federal Reserve Open Market Committee (FOMC) release their policy statement with respect to US Overnight interest rates. The FOMC kept the overnight lending rate at 0.25% and further reduced (tapered) their bond buying program by another $10 billion. Both of these were widely expected and the Federal Reserve remains on track to end QE by the end of this year, signaling that there is no change as of yet to seeing interest rates rise in the United States until the mid to second half of next year. Kevin Tay, chief investment officer for South Asia Pacific at UBS Wealth Management put out a note re-iterating that they do not think rates are going up anytime soon. Thus where risk is concerned they remain positioned for global equity growth.
The one set of comments that Federal Reserve Chairwoman did make that caused a swift market movement was that longer term inflation expectations have remained stable. This slight change in wording from ‘running below their inflation objective’ to ‘stability’ is an indication to the market that the FOMC is beginning to see signs of inflation. This also sent commodity prices for Gold and Silver strongly higher, with Gold moving higher by $65 an ounce in the span of three days. Futures, expiring in August, for the yellow metals are pointing that we could see continued appreciation towards $1350 per ounce.
In April we saw 5 year lows in the buying of gold futures on the COMEX, but now with these comments regarding the revival of inflation from the FOMC along with escalating tensions in Iraq, we have seen a swift rally in gold and other precious metals.
We remain modestly allocated towards gold and silver, but will look to increase our recommendation towards holding companies such as Goldcorp should this rally remain in place and not be a so called “head fake rally”. With respect to the other metals such as copper, which are driven more by global industrial demand, price has remained stable this year and we continue to recommend that investors hold well-run base metal producers. Should the precious metals rally remain intact we will be quick to recommend an increased ownership within your respective risk profile.
Over the past week we have also seen one of the greatest sporting tournaments begin in Brazil. Similar to watching the Olympics, we often find ourselves cheering for teams that we would never otherwise watch like Ivory Coast or Costa Rica to pull the upset. Whichever team is your favourite, enjoy the cheering. I know our office has been cheering extra hard for the Dutch, English and Italians and so far it has been a lot of fun.
Have a great weekend.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group