Market Watch – August 31, 2018

Last Month in the Markets: August 1 – August 31, 2018

What Happened In August?

Canadian investors with a domestic focus had another relatively disappointing month in August:

  • The TSX lost just over 1% for the month, which lagged the S&P 500 by over 4%, the Dow by more than 3% and the NASDAQ by nearly 7% once the differences are calculated and the effect of our declining dollar is included.
– U.S. indices stumbled at the end of the month as President Trump indicated that the threatened trade actions against Chinese imports, and likely Chinese retaliation, are proceeding and could be increased.  Nonetheless it was a strong month south of our border for equity investors.
  • At the end of the month, both the S&P 500 and the NASDAQ reached new record highs.  The effects of reduced corporate taxes, strong economic growth through the Gross Domestic Product (GDP) data and progress on North American Free Trade Agreement negotiations pushed U.S. equities higher.
– Mexico and the U.S. have announced a tentative agreement between the two countries.  Canada, at this point, has not come to terms with the U.S.  Some of the decline in equity values can be attributed to the lack of negotiating progress by Foreign Affairs Minister, Chrystia Freeland, and her team.

– It is possible that the tripartite NAFTA agreement could be replaced with three bipartisan trade treaties (U.S./Mexico, U.S./Canada and Canada/Mexico); that prospect has only been hinted at.

– The trade-related political wrangling with the U.S. makes the Canada/Saudi dispute seem like a distant memory.  Less than a month ago, the Saudi central bank was selling off Canadian instruments, regardless of price, to demonstrate their resolve that their domestic affairs are not open for discussion by foreign governments.

– For the NASDAQ and the S&P 500, the charge was led by Apple and Amazon, two members of FAANG, (Facebook, Apple, Amazon, Netflix and Google).  The market capitalization of FAANG stocks comprise about 12% of the value of S&P 500.

– That is, these 5 companies, which are 1% of the index are worth about one-eighth of the entire index.  Early on September 4th, Amazon’s stock price rose enough to push the company’s “market cap” past $1 trillion.

– Much has been discussed about the tech-heavy NASDAQ composite index, but the S&P 500 is moving in the same direction.

What’s ahead for September and beyond?

For Canadian investors interest rate policy will increase in importance during the last four months of 2018.  The U.S. Federal Reserve has reaffirmed its intention to continue to raise its Federal Funds rate, and Canada will pay close attention to their moves, as well as the strength of our economy. 

The strength of our economy will depend in large part on the success at the negotiating table with Mexico and the United States for NAFTA’s reset.  Expect Stephen Poloz, the Governor of the Bank of Canada, to pay close attention to U.S. monetary policy, NAFTA negotiations in addition to traditional economic indicators like employment, GDP and inflation.

Politics will continue to influence markets, and the remainder of 2018 will be no exception.  The U.S. mid-term elections will occur in 2 months.  The mandate of the Federal Liberals expires in a little over a year.  Canadians should expect the rhetoric, spending and programs aimed to generate employment, economic activity and favourable votes to increase in the short term.  The effect on the TSX should be positive, especially if NAFTA negotiations are successful.

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Article Source: Advisor Research Group – Market Update 08.31.2018