Last week, we saw North American markets stabilize, and equities continued to move higher this week. Though we anticipated a correction would happen at some point during the fall, and prepared for it, we still felt the impact of the pullback. Warren Buffet explained it best by saying “the rearview mirror is always clearer than the windshield.”
Since the October 15 low, the S&P 500 is up 12%, while the S&P/TSX is up 8%. We are confident about the markets for the remainder of the year and into 2015. Simply put, we believe that the reasons to own equity today are as follows:
- Low inflation
- Easy Global Monetary Policy
- Improving availability of money
- Steady economic growth
- Positive company earnings
Further one-off catalysts are always possible, such as today’s approval by the House of Commons of the Keystone XL Pipeline. The approval will send the bill to the Senate for a vote next week that could, for the first time, put the legislation on President Obama's desk. While this is one hurdle cleared for the project, ultimately, Obama has ultimate veto power on the issue. These type of events are difficult to predict, but we must remain aware of their potential impact on the economy and markets.
Global economic surprises have leaned on the positive side lately. The impact of lower oil and interest rates is filtering through the economy and improving business and consumer sentiment. The net result is increased disposable income and spending. Michigan Consumer Confidence Index rose to 89.4, the highest level since July 2007. This shows positive consumer expectations regarding the overall economy. Obviously, lower gasoline prices act as a sentiment booster. The National Federation of Independent Business (96.1) beat consensus (95.1), led by a modest increase in the net percent of business owners who plan to increase capital spending and more who expect higher sales in the next 3 months.
In addition, the weakness in commodity prices keeps pushing global inflation lower; hence, opening the door for Emerging Market (EM) central banks to provide reflation should the ongoing slowing in EM economic growth intensify. In all, with central banks in a good position to do more if global growth weakens, the world economy seems to be performing another soft-landing, with momentum likely to improve going into 2015.
Within the context of a lower commodity price environment placing continued probability of a lower Canadian Dollar, and with our analysts forecasting an approximate 85 cent dollar over the coming few quarters, we continue to focus our investment thesis south of the border. One of the primary sectors that we have been eyeing is the consumer sector, where today once again we saw retail sales increase by 0.3% during the month of October. With the busiest shopping season right in front of us we have been finding increasing value related to both the Consumer Staple and Consumer Discretionary sectors. Berkshire Hathaway obviously sees strong value within these sectors as well, as they announced this week that there are purchasing the Duracell Battery division within Proctor and Gamble.
In Europe, the economy grew faster than analysts forecast in the third quarter as Germany and France, Europe’s two largest economies, rebounded and Greece showed some signs of revival. While we remain cautious about investing in Europe, Marco Valli, chief euro-area economist at UniCredit Global Research in Milan remarked that “we see a picture confirming an outlook of weak growth but with limited risks of a relapse into recession.” The comment mirrors what Phil Messman, Manager of the Picton Mahoney Income Opportunities Fund, explained to us in a quarterly update meeting last week.
Locally, Civic election takes place Saturday, November 15th. While all elections are important, civic elections can often have the most direct and immediate impact on our lives. We encourage readers to make an effort to review the candidates, and find time to vote at your local polling station.
Thank you for your trust.
As always, we welcome your feedback. Have a great weekend.
The Dekker Hewett Group