Semi-Annual Market Update
Summer is finally here and for those who partake, baseball season is in full swing. Why are we talking about baseball? We use baseball terms every day, sometimes unwittingly. Which of us has not said “right off the bat”, “batting a thousand” or “touch base”. In fact, I used one in the opening sentence. Do you see it? It has certainly been an unusual first half for 2018.
Let us review some of the happenings with a baseball theme…
Three Up, Three Down
This is when an inning is over, after only three batters have come to the plate.
Elections don’t get crazier in Canada than our provincial one. Patrick Brown, almost assuredly going to be Ontario Premier, resigned in January. That forced a PC Party leadership election to be held three months before the actual election. The three major provincial parties duked it out. Kathleen Wynne actually told the electorate she was not going to win, which is unheard of! In the final tally, the PC party won a majority government, with Doug Ford elected as the Premier-designate. We have yet to see the impact of the PC platform, but in my opinion it cannot be worse than the other two offerings… hopefully.
A pitch that is too high, too short, or too wide of home plate for the catcher to control.
Buoyed by the US tax cuts, the Dow had the fastest gain of 1000 points in history, over the two weeks from January 4th to January 17th. Then we witnessed the two largest point drops in Dow history, 1,175 on February 5th and 1,032 on February 8th. Those big-point moves were scary but they did not even make the top 20 all-time losses in percentage. The stock market was pretty wild in the first couple months but has calmed somewhat. For all the bluster, we are not significantly different to date; DOW is -1.8%, SP 500 is +1.7, TSX is +0.4. That may change in the second half. The Waterfront Group equity portfolios fared well, to our pleasure and expectation.
NAFTA talks continue… I think. Apparently the teams will resume meeting in the summer. The chief negotiators are determined to keep working hard to modernize the 24-year-old trade pact. There was a federal election in Mexico on July 1st and there will be an upcoming US mid-term election in November. What effect these political changes will have to the NAFTA outlook is unknown. The only quick resolution I see is if somebody exits the agreement, otherwise the negotiation conclusion is months away. Now the WTO may be at risk.
There is a lot at stake here. Exports from Canada amounted to US $420 billion in 2017. 77% of Canadian exports, by value, were delivered to our NAFTA partners, almost 10 times as much as exports to Europe. Fuels and vehicles are the biggest components.
A knuckleball is a baseball pitch thrown to minimize the spin of the ball in flight, causing an erratic, unpredictable motion.
“Erratic and unpredictable.” That is the perfect description of Donald J Trump. I don’t care if you like him or hate him, you can probably agree that the President of the United States is predictable only in being unpredictable. From Stormy Daniels intrigue to Russian conspiracy fatigue. The FBI and CIA, fire that guy without pay. North Korean rocket man to the Singapore meeting has been planned. His approach to the Presidency is truly unorthodox in my opinion. Some call it genius, but I have my doubts much is planned. I suspect “The Donald” is more of a tactician than a strategist.
The market ignores a lot of what is said, thankfully. But trade wars are going to be different. Tariffs are real and damaging. So far we have 25% on steel and 10% on aluminum. Canada is not alone in this fight; Europe has the same tariffs imposed as Canada. China has been threatened with $250 billion in new tariffs in June. We are quickly escalating to a global trade war. This is not good for anybody.
A fast ball deliberately thrown at or too near a batter’s head to intimidate the batter away from the plate.
Justin Trudeau had a reputation as the “Trump Whisperer” until a couple weeks ago. At that time the president revoked the exemption Canada had expected to receive on steel and aluminum tariffs using the bogus concept of U.S. security concerns. I have my doubts about Prime Minister Trudeau, especially on the tax file, but I am not ashamed to say I was proud when he informed the US government of Canada’s intention to apply equal counter tariffs on American imports. I had not originally expected that kind of push back. We may regret it, as a tit leads to a tat, but at least we can hold our heads proudly in the bread line.
TD Bank recently put out a report that estimates due to auto tariffs Canada could lose 0.5% of growth and threaten 1 in 5 Ontario manufacturing jobs. Scotia Bank said in a report that in an all-out global trade war, North America could be pushed into recession, including a 1.8% cut to Canada’s GDP.
Canada is in a difficult situation. We are faced with an uncertain but real threat from our largest and most closely intertwined trading partner. If NAFTA talks fail and the US follows through with the threat of tariffs, especially 25% on automobiles, there is a chance that Ontario may be pushed into recession. This is not our base case. We believe NAFTA will be resolved, eventually. It is acutely plain that Canada is extremely vulnerable to the whims of our neighbor to the south. We must find new ways to distribute our goods and services beyond America. Oil in particular, as there is a very logical and immediate method to do so. If we fail in our task, Canada may find itself as a country no longer desirable for capital investment.
On the Ball
Another baseball idiom that I have been hearing a lot lately is we are in “the 7th or 8th inning” of this market rally. The Waterfront Group has learned it is important to realize that each business cycle, like every baseball game, has its own life. There is no clock ticking down, it takes as long as it takes. We may actually be in the late innings of this market rally, but the recent stimulus of tax reduction in the US and potential infrastructure spending may push this one into extra innings.
If you return to some of our previous updates, we have been expecting higher interest rates, we have talked about the NAFTA issue and the incredible importance of trade to the Canadian economy. The Waterfront Group remains cautious, and we have adjusted your accounts to reflect that view. We had a taste of a downturn in February, our accounts performed as we expected, and we were pleased.
It is important to remember the market corrects, it is healthy. As the great “Bambino”, Babe Ruth said, “Every strike brings me closer to the next home run.” Happy belated Canada Day and congrats to our Winter Olympic athletes on winning the most metals ever!
Dan W. Wynnyk
Vice-President, Investment Advisor