This week global capital markets have remained cautious as we received slower than expected economic data out of China, as-expected data out of the US, and we continue to await referendum results in Crimea. Capital markets never like uncertainty, thus we are experiencing a soft week in every market except for Gold. To put this week into a dollar context, the concern over Crimea and the weaker-than-expected Chinese economic data have erased approximately $1.2 trillion in value from the global capital markets.
A rising gold price has helped the Canadian markets as investors sought a safe haven amid those rising concerns between Russia and Ukraine. With the U.S. and European Union threatening sanctions against Russia if it does not back away for annexing Crimea, and already announcing that they, along with Canada, will not recognize the results of the referendum this weekend, we expect to see continued strength in Gold for the near term.
While a greater than $1 trillion decline in aggregate global markets and a near $50 rise in the price of gold sounds ominous, it really is not. In taking a longer term perspective, the S&P 500 is down about 1.5% this week and is essentially flat for the year, while Canada is virtually unchanged for the week (despite all this headline news) and up about 3.5% for the year. So taken within a larger context with a focus towards longer term thinking, this week’s media headlines are really more distractive noise than anything else. As Patrick Spencer, head of equity at Robert W. Baird & Co. in London, said this morning, “markets will see this through and a regional event is not a reason to change your investment thesis.”
Faced with signs of financial market stress we have definitely been content to maintain current cash positions for clients, however, we always see times of short term market turmoil ripe for long term opportunity. As per the above quote from Patrick Spencer, we maintain our longer term investment thesis and look to take advantage of any near term market negative sentiment to build on that thesis.
Another of the longer term economic data points that we are keeping a very close eye on is inflation. While we have not yet seen much in the way of inflation, we are starting to see signs that the underlying variables are beginning to point in that direction. This week the Federal Reserve policy makers commented on a broad range of job market data. The short term unemployment data was one that stood out to us, as it suggests that the U.S. labour market is tightening, raising the odds that a pick-up in wages could eventually lead to faster inflation.
This is important because the U.S. Federal Reserve has been citing a slack jobs market for quite some time as a key determinant in keeping short term interest rates at near zero levels. So while there is little sign of inflation currently, we can’t remain at near zero interest rate policies without any worries about future inflation. Should the U.S. labour market tighten more quickly than the Federal Reserve is forecasting, we could see that inflation pick up sooner (and faster) than later.
In a note out to investors this week, James Paulsen, the chief investment officer at Wells Capital Management in Minneapolis wrote, “The overall culture may be shifting from deflation worries to concerns about the likelihood of emerging inflationary pressures.”
Thus, we will be keeping a close watch on what happens this weekend in the Ukraine, along with employment data out later this month, we may be presented with an opportunity to add to our longer term thesis at attractive valuations.
Now that RSP season is over, most people are busily compiling their applicable tax slips in order to file their taxes for 2013. We would suggest that our readers do not file until receiving all of their taxable income / dividend slips, many of which are not even issued by the respective reporting company until March 31st. Should you be unsure as to whether or not you have received everything for your tax filing, please do not hesitate to call us and we will make sure that you or your accountant are not missing any tax filing information.
On a side note, for any of our readers who enjoy cooking or would like to improve their skills in the kitchen, the Dirty Apron on Beatty Street is a fun place to spend an evening. Earlier this week, our entire office spent the evening at their “Primo Italiano” class and I think it is safe to say that a very good time was had by all. No matter what your existing cooking ability is, if you are looking for something a little different as an evening out with friends or family, you will have a great time.
Have a great weekend.
Thank you for your trust.
As always, we welcome any feedback.
The Dekker Hewett Group