North American equity markets seem to have stabilized after the correction we saw through September and October, but we caution against stating that no further downside risk may occur. Thus although we remain cautious we have taken advantage of the recent correction to put some monies to work on behalf of clients as we are positive towards the markets on the whole.
The biggest news this week was the U.S. mid-term elections where the Republican Party gained control of the Senate for the first time since 2007. This will now result in a Republican controlled House of Representatives and Senate with a Democratic President, similar to the political situation during the final six years of Bill Clinton’s Presidency. History has shown that during periods of this type of gridlock the North American capital markets have delivered positive returns. One immediate direct investment impact of the mid-term elections will be on Canada’s energy sector with the TransCanada Corporations Keystone XL Pipeline now back in the forefront with respect to the approval process.
Longer term the capital markets are driven by fundamental economic data, which continues to come in positive, with employment gains exceeding 200,000 for a ninth straight month. The jobless rate continues to decline, coming in at 5.8%, boosting the share of the population working to the highest in five years. Steadfast hiring signals employers are confident domestic demand will hold up in the face of struggling European and emerging economies. As Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York put it in a note this morning, “The economy is still on a favourable path.”
This week we also saw strong employment data here in Canada, as our unemployment rate fell to a six-year low of 6.5% last month on hiring led by the retail and financial service sectors. David Tulk, chief Canada macro strategist at TD Securities in Toronto said in an email note to clients today that the report was “solid the whole way through and that it will be a huge challenge for the bank of Canada to justify greater slack in the economy.” While the Canadian markets remain below where they were just a couple months ago, the continued economic strength exhibited by a continuing decline in unemployment gives us confidence that the Canadian economy is on good ground.
For most of us, the market volatility that we saw in the spring / summer of 2013 during the so-called ‘taper tantrum’ is still fresh in our minds, thus the most recent period of market turmoil has us re-evaluating how we define risk. Within our evaluation process we are increasingly rethinking how we fundamentally look to define risk and that using a backward looking measure of risk may no longer be the most appropriate measure for future risk. We think we can do better for our clients by explicitly recognizing intra-market correlations are just as important (if not more) than the statistical calculation of risk.
During our own process to redefine risk we came to the conclusion that long-term steady performance is more about avoiding losses than it is about capturing the largest of gains. In changing focus towards delivering strong risk-adjusted returns and away from just the highest returns possible it is our belief that your returns will become steadier, with greater consistency, but more importantly avoid those infrequent drawdowns that cause stress.
We have been in development with our risk management and portfolio strategist teams to provide our clients a tool that optimizes capital protection for our clients during these unpredictable periods of high market stress and will be hosting several events over the coming number of months as we introduce this additional tool to our portfolio management. Stay tuned!
Please remember November 11th on Tuesday.
Thank you for your trust.
As always, we welcome your feedback. Have a great weekend.
The Dekker Hewett Group