The Market Takes a Breather

Good day, 

February was another strong month for equities: TSX finished up 2.95% and the S&P 500 up 3.05% (in CAD). We saw low volatility in February as the US Fed indicated rate hikes would be more subdued as they “exercise patience” in 2019.  Global markets also reacted positively to news on the China/US trade negotiations, particularly on February 24th when Trump announced he would delay tariff increases that were to go into effect on March 1st.  The original plan was to increase tariffs from 10% to 25% on $200 billion of Chinese goods.

Despite strong numbers over the last two months (best start to a year since 1987), we remain cautious on equities.

While the TSX Composite closed the month less than 4% from an all-time high, Canada’s 4th quarter GDP came in at 0.1%, which was well below expectations and indicative of a slowing economy.

  1. Even though a US/China trade deal has yet to be confirmed, a positive conclusion appears to be fully priced into equities. We wonder if and when an agreement is reached if it turns into a “buy the rumour, sell the news” event.
  2. Economic numbers seem to be coming in weaker than expected; the chart below shows the Citigroup Economic Surprise Index vs S&P 500 P/E (Price to Earnings Ratio)
  3. The Economic Surprise Index measures the difference between economist expectations of economic data and reported economic data, and as shown below in blue, it’s weakened since the start of 2019.
  4. The S&P 500 forward P/E ratio has gone up since the start of the year, from around 14.5 to 16.5 (red line below) and moving back above its 10-year average of around 14.75.

With the strong rally we’ve had over the past couple of months, this looks like a good place for the market to take a breather.

For now, we continue to play things defensively and remain heavily weighted to alternative asset classes such as asset-backed lending, bridge financing, factoring (the purchasing of receivables) and MICs (mortgage investment corporations).  If equity markets indeed pull back to more reasonable valuations, we will consider adjusting weightings accordingly.

Have a good weekend.


Daniel Popescu CFP, CIM, FMA, FCSI

President & CEO



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