Market Commentary October 31, 2018
October has seen one of the longest and sharpest sell offs in years. The North American indexes were close to correction territory (a drop of more than 10% in value). At time of writing, the TSX was down 6.9% for the month which brought losses to 7.7% for 2018. The DOW Jones in New York was down 5.4% for the month and holding a small gain of 1.5% for 2018. The NASDAQ which was leading all indexes in gains for 2018 fell the most at 9.3% for October and is now only positive by 5.3% for 2018.
The market selloff was sparked in large part due to the continued rise in interest rates and the central banks commitment to continue to raise them going forward. What this does is create greater yield for low risk investments. When this happens, it puts more pressure on risk (stocks) assets to perform better. If investors take on risk, they want more return for that risk. If the markets are moving back into a period of low growth then the return on the risky assets may not be worth it, and thus there is a shift in money toward safe haven assets. The second driving force in the selloff was the continued discourse between the US and China over tariffs and trade imbalances. Investors are worried about what impact the tariffs are having on companies who deal in both of these markets, although we have yet to see significant impacts on corporate earnings. Just this week, China announced they would reduce taxation on automobiles sold in China to make them more affordable and help spur on that sector of the economy and boost output.
The legalization of Cannabis in October will now bring some economic data to the sector that has been spurred by so much volatility and speculation. The culmination of legalization and what appears to be widespread use of the drug across Canada, and retail outlets seem to have been able to keep up with demand. Given that Ontario only has online sales until April of 2019, the sector should see a boost in sales when data is reported again in mid 2019. Also keep an eye on secondary sectors seeing a boost in sales, areas such as tourism, shipping/courier and other related healthcare/pharmacies.
Overall corporate data is still looking healthy. Canadian GDP numbers just announced show the economy growing at a healthy rate of 2.5% GDP and US employment data is also healthy with new jobs created at over 225,000 for the month of September. Unfilled positions in the US remains at just over 7 million (almost a record high).
One thing to remember about this latest market correction is that things like this happen in the normal course of market activity. You may recall that a selloff happened back in the third week of January that lasted for 2-3 weeks and saw again around 10% of index values wiped away, before a recovery came through. In most years this will happen once or twice, we just haven’t seen it since 2015. This is normal, and the markets will bounce back in time. Don’t make rash decisions today, and try and take advantage of your investments being on sale.
Thank you for reading,
Please see the attached link for additional market commentary.