This week we saw the Bank of Canada announce that it would be maintaining the overnight key lending rate at 0.5% and next week everyone is eagerly awaiting the Federal Reserve’s rate announcement. Within the conversation of Central Banks, we are now seeing the Bank of England, led by former Bank of Canada Governor Mark Carney, pave the way for higher borrowing costs as well, the Monetary Policy Committee said this week that their economy continues to expand at an accelerating rate.
While a lot of people are obsessing over whether or not the FOMC will raise rates this meeting or next, it is safe to say that the US economy continues to strengthen and rate increases are in the cards. Thus we expect to see the increased volatility witnessed throughout August to remain in place and the marketplace to stay undecided over the next few weeks.
Within our Bank of Canada’s Monetary policy Report it was noted that core inflation remains close to 2 per cent, with disinflationary pressures from the economic slack from the energy sector being offset by other sectors; while stimulative effects of previous monetary policy actions i.e.; the rate cuts in January and July of this year, are working their way through our economy.
Last week we spoke about the impact China has on our exports, however it is the United States that consumes the vast majority of Canadian exports. Economic activity in Canada continues to be underpinned by solid household spending and a firm recovery in the United States. Thus we continue to see the US Consumer, Technology and Healthcare sectors remaining attractive.
In meeting with Kevin Headland, Director of Capital Markets and Strategy at Manulife this week, we remain confident that with the U.S. labour market continues to show signs of growth. This, along with positive housing starts and consumer income show that corporate North America remains healthy. While Wall Street is cautious in part because of the upcoming Federal Reserve meeting and how the markets will react once they do shift their policy towards a tightening cycle, there is general agreement that a Fed rate increase would bring confidence to the overall market place. This brings us back to our earlier point that we expect to see a decidedly choppy September market, with opportunities presenting themselves that we will be looking to take advantage of.
We would also note that while we don’t often speak about technical analysis within this market commentary, we are seeing technicians note that volatility appears to have peaked and that a gradual decline is a bullish indicator for the markets. With both fundamental strategists as well as technical analysts anticipating that the markets are setting-up for a positive fourth quarter, we are reasonably bullish at this time. On average over the past 43 years the S&P 500 has advanced 7.4% in the fourth quarter of the year. While we are certainly not going to predict a 7.4% gain over the next few months, we do feel that current market conditions suggest a stronger end to what has been a negative year thus far.
Today marks the 14th anniversary of the September 11th attacks on New York City and Washington D.C. Please take a few moments to be thankful that we were not there and remember those who were.
Whatever you decide to do this weekend, have a great time.
We never forget that working for our clients is an expression of your trust, and we promise to always uphold that trust. Thank you.
As always, we welcome your feedback.
The Dekker Hewett Group