Second quarter secular trends fantasy portfolio results are now posted

With the second quarter completed, I’ve updated my secular trends fantasy portfolio performance report.

It’s been a strong year so far for the overall performance, but some themes are doing much better than others.

The total portfolio has delivered a 5.89% total return so far this year. The leaders are Amplify Online Retail ETF (IBUY), up ~25% and ETFMG Prime Cyber Security ETF (HACK), up ~17%.

The laggards are Vanguard FTSE Emerging Markets ETF (VWO), down ~7% and iShares Global Clean Energy ETF (ICLN), down ~5%.

By contrast, my secular trends benchmark is up only ~1% year to date. Other major indexes have total returns year to date as follows:

  • NASDAQ (QQQ) +10.6%
  • S&P 500 (SPY) +2.52%
  • TSX Composite (XIC) +1.14%
  • Dow Jones Industrial Average (DIA) -0.91

So, secular investing this year so far has done fairly well even though performance varies widely by theme. See the full performance report here.

 

My Q2 2018 portfolio review has been published

I’ve published my second quarter of 2018 portfolio review. In it I discuss my current take on managing our household portfolio, some of the trades I’ve recently made and my thoughts for the rest of the year.

See my review here.

The June 2018 OSC content has been published

The material from the June 12, 2018 Ottawa Share Club meeting has been published. It includes:

  • Peter’s slides presented by Brad and Eric on the use of advisors through the investment lifecycle.
  • Peter’s appendix about the difference between a dealing representative and an advising representative.
  • Margot Pomerleau’s slides on how to work with a financial advisor.
  • A pamphlet from Margot Pomerleau’s firm on the complaints process for retail investors in Canada (bonus material).

See all the content here.

Breaking my own asset allocation rules

I have a confession to make. I have broken my own asset allocation rules with my second quarter trades.

I bought more equities even though I was already a bit overweight in them.

Why did I do this?

My reasoning is as follows:

  • I have a relatively low target equity weight to begin with (46% of our portfolio)
  • I had a lot of cash on hand (way over 10% of our portfolio)
  • I have more cash becoming available due to savings, bond maturities, dividends and interest in the next 12 months or less
  • quite a bit of that cash was in our TFSAs and I wanted to get that money working at better than than bond returns since the returns are tax free
  • bond yields are still not that attractive in spite of rising rates (~3.1% yield-to-maturity on a five-year investment grade corporate bond)
  • there are a lot of relatively good deals in consumer staples, utilities and telecommunications right now – several companies are off their highs and are trading at reasonable multiples
  • these three sectors are pretty defensive and could do OK in a recessionary environment
  • I only bought high quality equities with relatively low risk and often decent dividends (with one or two exceptions)
  • I did not add any new positions, just added to our existing holdings to increase their position size to something more in line with our average position size
  • Next quarter is another opportunity to review our portfolio and decide if we should trim some of the big gainers, especially in technology, which are starting to become more dominant single positions in our holdings

What I bought (all in our TFSAs):

  • Algonquin Power (AQN) – initially bought in my Canadian TFSA and journalled to my US TFSA to get the dividend that is paid in US dollars without conversion back to Canadian dollars
  • Bell Canada Enterprises (BCE)
  • Fortis (FTS)
  • Loblaw (L) – has a relatively low dividend
  • ONEX (ONEX) – this is an exception as it is a growth stock with a very small dividend in the multi-sector holdings industry
  • North West Co (NWC)
  • Telus (T)

I also bought some bonds:

  • CALLOWAY-I 3.985% 30MY23
  • FAIRFAX FINL 4.5% 22MR23
  • CANADIAN WESTERN BANK Maturity Jun 16 2022 Coupon 2.737

So, after this investment “spree,” our weightings vs. targets are as follows:

Asset Type Planned Actual Variance
Equities 46.0% 51.9% 5.9%
Bonds 36.0% 29.6% -6.4%
Bullion 9.0% 9.1% 0.1%
Total Cash/Near Cash 9.0% 9.4% 0.4%
TOTAL 100.0% 100.0%

All in all, we’re still in a pretty conservative posture and continue to have flexibility with cash levels if needed.

More to come in early July when I publish my Q2 portfolio review.

Brad’s updates to Steven Brown’s retirement forecaster tool are now available

Brad updated Steven Brown’s Retirement Forecaster Excel spreadsheet tool (version  2.7.2). The changes are as follows:

Version 2.7.2 provides support for defined benefit (DB) pension plans with a Bridge Benefit (such as the Fed Government or Ontario Teachers) and the accompanying DB Survivor pension. Detailed input instructions are provided on the Instructions sheet, under the Instructions section.

You may access the material on Brad’s page here.

Secular trends fantasy portfolio launch

I’ve launched a new fantasy portfolio on the money4retirement.ca website to track secular, or thematic trends for investors.

A secular trend is:

An investment trend associated with some characteristic or phenomenon that is not cyclical or seasonal but exists over a relatively long period.

The rationale for doing this and the initial portfolio structure is presented here.

The first secular trends fantasy portfolio tracking report (and its benchmark) is presented here.

I’ve also added a new menu option called “Secular trends and investing” on the site for quick access.

The eCommerce secular trend made news today

WalMart, the once-stodgy bricks and mortar retailer, made news today with its largest acquisition ever – $15B US for 75% of eCommerce retailer Flipkart in India.

It reportedly beat out Amazon for the deal.

WalMart shares dropped 3% on the news.

Amazon’s shares rose 1%.

Softbank appears to have done very well. Other players were involved including Alphabet, Microsoft, Tencent Holdings and Naspers.

The deal hasn’t fully closed yet….

More from Bloomberg here.

 

The decks from the April 2018 OSC meeting are posted

The decks from Mark Seed on DRIPping and from myself (Michael Patenaude) on the Q1 2018 OSC fantasy portfolios and sector allocations presented at the April 17, 2018 Ottawa Share Club meeting are posted here.

America is indeed exceptional – with government debt

“In its newly released April 2018 Fiscal Monitor, the International Monetary Fund projected that the United States is the only — yes, only — advanced economy in the world expected to have its debt burden get worse over the next five years.” – Washington Post

Tax cuts, and the possibility of more or extended tax cuts. Who’s going to pay the government’s demographically-driven growing bills?

What’s next, cut entitlements? That doesn’t sound recessionary to me (/s for sarcasm!).

By contrast, Canada is doing pretty well with its debt management. Ignore the noise, focus on the facts. Glad to be north of the border.

My 2018 first quarter portfolio review is now published

I’ve completed my first quarter portfolio review.

Quite a difference from last year so far. Our household portfolio is flat so far this year. That’s a bit better than some of the major indexes, but not all.

I have a link in my review to some evidence that markets in the US might be soft until the mid-terms, and then could rebound a lot. So hopefully things will improve as the year progresses.

Find out more here.

What US macro risks are investors facing these days?

It’s been over a year since I last wrote about macro risks emanating from the US and how they might affect Canadian investors.

Given how many changes are taking place in the macro environment recently, and how influential the US macro situation is for Canadians, I thought it would be interesting to do an update. The idea is to try to identify major driving factors that might affect US, Canadian and global equity markets in an effort to reduce the “surprise factor,” which may in turn lead to bad investment decisions (out of fear or panic).

So what does the macro risk profile look like south of the border? No one really knows for sure of course, but it is interesting to contemplate, especially if you have any US holdings in your portfolio.

Let’s take a look at some of the frequently-cited risks that may affect investors and try to determine if relative risk levels have increased or decreased since my last effort at this in January 2017.

I have listed them from what I propose are the highest to the lowest risks.

Notation used:

⇑ = risk is increasing

⇔ = risk is not changing

⇓ = risk is decreasing


Tax Risk = ⇑ (increased risk rating since Jan/17)

Definition: the risk that an investment will lose its value or return on capital because of taxation (most investments are subject to this risk)
My take: Recently, Trump decided to impose new taxes, in the form of tariffs, on steel and aluminum, and on various goods manufactured in China. China is already beginning to retaliate, raising the prospect of a trade war. It is unclear if Trump will lay on even more tariffs. It remains to be seen what the economic impact of new tariffs will be but the general consensus appears to be net negative due to rising costs of goods for consumers. Corporate and limited personal income tax cuts were delivered in December 2017 so that matter is settled for now.


Political Risk = ⇑ (same risk rating as Jan/17, but the overall risk is likely higher)

Definition: the risk that an investment will lose value because of political action in a country where one has investments, including one’s own country
My take: While his core support seems to be holding, the US president remains erratic and sensational in policy pronouncements, his cabinet turnover is record-setting, new cabinet and legal advisory appointments are arguably increasingly controversial and recently look like they are veering hard to the right of political spectrum and more confrontational in tone. Relations with Iran may become increasingly strained while relations with North Korea could possibly (but not likely) improve (the new national security advisor, John Bolton, advocates war with both countries). The president continues to accommodate, even congratulate Russia while many observers suggest this is inappropriate given demonstrable evidence of Russian interference in the last US election among several other concerns. The Mueller investigation continues to slowly gain momentum on three fronts: Trump’s possible (likely?) obstruction of justice; Trump/team conspiracy with Russia to tip the last election; and Trump/family financial dealings, including potential money laundering. New revelations about Cambridge Analytica’s role in the 2016 election and potential connections to Russian interference are gaining a bit more traction. The trial for Paul Manafort, Trump’s former campaign chairman, begins in July and further indictments by Mueller in other cases remain likely. The ongoing investigation means a constitutional crisis could easily be triggered if Trump does indeed fire the Special Council as he reportedly intended to do last summer, and may be more inclined than ever to do given his recent appointment of Joseph diGenova, who claims the domestic security establishment (a.k.a. “deep state”) in the US is trying to frame Trump. The possibility of impeachment is likely remote still, but increasing. There are mid-term elections in November which could lead to one or both Houses of Congress flipping to the Democrats, thus hobbling Trump’s agenda and making him accountable. Given all this uncertainty, I believe political risk is elevating in the US and by extension the world.


Market Risk = ⇑ (same risk rating as Jan/17, but the overall risk is likely higher)

Definition: the risk that an investment can lose its value in the market (applies to equities and fixed-income investments)
My take: Given the US market had been climbing steadily since November 8, 2016, the recent pullbacks have been long overdue. Most market gyrations tend to be short-term in nature and are of little consequence to long-term investors. Many commentators still claim the market is over-valued based on historical price/earnings ratios. Overall though the backdrop of corporate earnings, economic growth and planned orderly increases in interest rates contribute to medium term optimism in equity markets. There are no compelling hints of a recession yet on the horizon. Having said that, volatility has been increasing so far in 2018 (the ^VIX is up 125%), in large part due to increasing political, inflation and tax uncertainties. Market risk is being reflected CNN’s Fear and Greed Index (7% out of 100%) and in the recent drops in major indexes. Of the three major US indexes, only the NASDAQ is in the black so far this year. I would suggest market risk is rising due to heightened uncertainty in the political and tax environments discussed in this post and the recent increase in volatility.


Legislative Risk = ⇔ (reduced risk rating since Jan/17)

Definition: the risk that an investment will lose value or benefits because of new legislation (all investments are subject to this risk)
My take: This risk is related to political risk. The most recent spending law (as of writing today still unpassed before a midnight deadline) appears to be ignoring fiscal conservatism. Regulations related to offshore drilling, the environment and banking have been changed and, again, in the short to medium term are being well-received by investors. Longer term, these changes could be damaging to the US economy by contributing significantly to increased US fiscal indebtedness, reckless banking practices, over-stimulation of the economy, environmental degradations and potential knock-on inflationary impacts. NAFTA talks drag on, with some signs the US may be softening its position, especially in the auto sector. If a new deal is not struck soon, there will be little time for Congressional ratification, leaving the future uncertain. We don’t know what else could be forthcoming in the legislative and regulatory environment, but presumably not too much will change before at least the fall mid-term elections. If in fact a Democratic House of Representatives emerges, this would likely provide a damper on Trump’s legislative agenda.


Interest Rate Risk = ⇔ (reduced risk rating since Jan/17)

Definition: the risk that an investment will lose value due to a change in interest rates (applies to fixed-income investments and sometimes to equity investments depending on investor expectations for interest rate changes)
My take: Interest rates are still on track to rise three times this year (once already this week) even with the appointment of a new Fed Chairman. With two more rate increases promised in 2018, on top of this week’s rate increase, the market should be prepared. Wage inflation, in large part due to low unemployment coupled with economic growth, could also be a driver of higher than expected interest rates later this year, which could be bad for equity markets. We saw the market react to some of these expectations earlier in the year. Due to the combined effects of tax cuts and increased deficit spending expected this year, the US federal debt will climb, which is not positive for rates longer term. This is a tough one to forecast at the best of times but on balance it would seem interest rate risk in the short to medium term has decreased since January 2017.


Purchasing Power Risk = ⇔ (reduced risk rating since Jan/17)

Definition: the risk that an investment will lose its purchasing power due to inflation (applies particularly to cash and fixed-income investments)
My take: This risk is somewhat related to interest rate and tax risks in that the main concern would be higher-than-expected inflation, driven by wages, higher health care costs and possibly new tariffs, but counterbalanced to some degree by lower personal and corporate taxes. If Trump’s policies end up being inflationary then purchasing power may erode. This would likely take some time to happen. On balance the risk of higher inflation, from a very low level since the 2008/09 financial crisis, has probably increased, but for the short to medium term does not appear very likely to happen. The recent tax cuts, especially to individuals, will marginally add to purchasing power in the short to medium term and low unemployment could eventually cause wages to go up, improving purchasing strength of individuals.


Liquidity Risk = ⇔ (same risk rating as Jan/17)

Definition: the risk that an investment will not be easy to sell when needed (applies to some equities that don’t trade in large volume, fixed-income investments and real estate and other property that may be hard to sell quickly at an equitable price)
My take: I don’t see any reason to think liquidity risk has changed since January 2017– at least not in the short term. If some of the other risks in this post materialize, this could change, and possibly quickly. I leave this risk at the mercy of “black swans” without changing the risk rating from January 2017.


Reinvestment Risk = ⇓ (same risk rating as Jan/17)

Definition: the risk that an investment will be reinvested at a lower rate of interest when it matures (applies to fixed-income investments)
My take: If we expect interest rates to continue an orderly climb higher in 2018, new money that is being invested in fixed income should attract higher rates. If one deploys fixed income funds to rate reset preferred shares and/or bond funds or bond/GIC ladders of short to medium term duration (e.g. five years or less) then reinvestment risk should be falling.


Are there any actionable ideas here?

I believe that several risks I am tracking are falling, but the three risks that I believe are increasing (political, taxation and market) could have major impacts in the short to medium term. Longer term I remain somewhat optimistic.

But….

With rates rising south and north of the border, and related sector rotation, there has been pressure on utilities, telecoms, consumer staples, materials and energy this year. Bond prices are slightly weaker so far this year as rates rise. I recently added to both utilities and bonds.

If the technology sector continues to outpace this year, I will at some point likely need to re-balance to reduce the percentage this sector represents in our portfolio. It is roughly 20% now and rising.

As stated over a year ago when last reviewing macro risks, I continue to balance short-term risk with longer term secular trends. Since January 2017 I have bought an ETF for robotics. I continue to hold biotechnology and water-themed ETFs and I continue to hold Shopify in the e-Commerce space (although I trimmed it somewhat last year). I am researching both alternative energy and cybersecurity as other possible investment themes for new cash in the future (and likely will be writing articles on them for Canadian MoneySaver).

In conclusion, it remains pretty much stay the course for me. I have an expectation that things will be more volatile in equity markets in 2018 compared to 2017. So I remain prepared for that eventuality. Otherwise, who knows?

Be greedy when others are fearful?

Just a quick post to point out that for the third time so far this year, CNN’s fear and greed index is down below 10 (on a scale of 0 to 100). This suggests, by its seven measures, investors are “extremely fearful” of the US equity markets right now.

Hmmm. What’s on sale in the markets? (Hint: telecoms, consumer staples, energy, utilities and materials).

The material from the OSC March 13, 2018 meeting is posted

See the material from last Tuesday night’s meeting featuring:

  • Callum Sutherland, Financial Security Advisor, Freedom 55 Financial deck on Behavioural Finance and RRIF plus Annuity Strategy
  • Dave and Eric’s presentation on Market Corrections
  • Notes taken by Andre about PJ’s suggested trade in the OSC

See the content here.

My trades made March 2018

I had some unexpected time available today to make my first quarter trades (normally made on the 15th of the month, so a day early).

I previously posted some considerations I had in mind for this cycle, and received some helpful feedback in reply to that earlier post (thank you FletcherLynd!). I also posted a related question to 5i Research. (All the feedback and discussion is contained in the replies to my earlier post if you wish to follow along.)

So, in the end I did the following to take advantage of utility stocks for sale at a relative market discount and to address some major holes in our bond ladder:

  • Sold Valener (TSX:VNR) and bought, with the proceeds and a small top-up to a full position, Algonquin Power (TSX:AQN) – this trade is intended to improve the quality of my utility holdings (I still like VNR but I like the total return prospects of AQN better)*
  • Topped up Fortis (TSX:FTS) and Brookfield Renewables (TSX:BEP.UN) to bring them to full positions
  • Journalled the new BEP.UN shares from a Canadian dollar account to a US dollar acount (BEP) to capture dividends in US dollars without incurring currency conversion rates (this will occur on settlement March 16) – I bought in a Canadian dollar account because I didn’t have enough US cash in the account to make the purchase directly in the US account
  • Bought about 25% of my required bond purchases for the year, going short duration to fill holes in my investment grade ladder and in anticipation of higher rates later in the year (I will buy slightly longer duration bonds in June, September and December):
    • FORD CREDIT CANADA LTD SR UNSECURED Maturity Jun 22 2022 Coupon 2.766 for a yield-to-maturity of 2.9%
    • FAIRFAX FINL 6.4% 25MY21 for a yield-to-maturity of 2.84%

The net result is I’ve gone a bit overweight equities (I was slightly over-allocated already before trading). I sit at 49.5% versus 46% target, in part because equities, in spite of the correction last month, are still surging in my portfolio (tracking 17.3% on an annualized basis so far this year).

I’ll keep an eye on equity allocations as the year progresses and may trim a bit in technology if current trends persist. New cash should also help offset this imbalance a bit.

I will be doing my quarterly review at the end of the month and will post it along with my previous reviews here.

*Full disclosure – I’ve been a bit erratic with Valener. I bought it in September 2017 (just six months ago) as a long-term holding. At the time I wanted to buy Algonquin Power but thought it was too expensive. I have traded VNR for AQN opportunistically because of the sector rotation taking place in utilities that has made AQN’s price a more attractive entry point.

My thoughts on trading this quarter (Q1 2018)

I have purposefully set a quarterly trading date for my buying and selling of securities to prevent over-trading and to provide time for reflection between trades.

Mid-March 2018 is my next trading window. What am I thinking?

I have accumulated a fair bit of cash/short-term bonds in our portfolio (almost 21% compared to our 9% target) that needs to be deployed. We are currently underweight bonds in our bond ladder (22% vs. 36% target), slightly overweight in stocks (48% vs. 46%) and about even in bullion at 9%.

I intend to purchase 1/4 of our underweight amount in bonds and will continue along the same path for the remaining three quarters. Yield to maturity in the retail, investment grade bond market, available via my discount brokers is now sitting at about 3.4% on five to six year maturities. So I will seek out positions of that nature. I also need to top up a bit in the three-year and four-year timeframes. So, as March 15 approaches, I will start filling those gaps.

The only other trade I am contemplating is to take advantage of the market’s current lack of interest in dividend paying stocks like utilities. I have been wanting to purchase Algonquin Power (TSX: AQN) for some time, and it now sits at a forward P/E of 16.47 and a growing dividend of 4.67%, rising steadily since 2009, which is pretty good for this “growthy” dividend payer.

FASTGraphs shows a total annual rate of return since January 2010 of 18.5%. YCharts shows it at a cumulative return of 370% in that same time period  and StockRover shows a 102% cumulative five-year total return.

According to YCharts, it is 8.5% under value, and according to FASTGraphs it is 7.9% under value on a P/E basis. FASTGraphs has it at a 16% discount using historical price/operating cash flow measures. It is nearly 10% off its 52 week high.

So, even though this stock will push our equity allocation even a bit more over target, I believe it is a good addition to our portfolio, especially as we get a little closer to retirement. I may look to trim technology stocks again later this year to re-balance down a bit, since they seem to be making the fastest gains again so far this year (buy low, sell high is my thinking). As our savings, dividends and interest payments accumulate over the course of the year, the equity allocation will trend down slightly in relative terms (all things being equal).

I don’t really want to add another position (going to 34 equity holdings from 33), but I can’t see anything else to sell outright at the present time. And I do like AQN.TO, as does 5i Research (“one of our favourites”) who I follow. The latest commentary from 5i on the March 2 quarterly report suggests fundamentals are good (especially earnings). AQN’s recent acquisition seems to be working out fine as well.

Update on the Etobicoke Share Club

I received an update from the Etobicoke Share Club that is getting up and running.

Meeting dates moving forward for the spring are on the 1st & 3rd Wednesday of the month at 6:30pm.

Upcoming meetings:

  • March 21st
  • April 4th
  • April 18th
  • May 2nd
  • May 16th
  • June 6th
  • summers off

Meetings are held at Bloor & Islington,  Centre Tower food court.  3300 Bloor St. W. Toronto.

Tell your friends and family in Etobicoke area (if you have them!)….

If you want more information please contact: etobicoke.investors [at] tutamail [dot] com

Another new ETF to play the robotics and AI secular trend

I wrote an article about robotics/artifical intelligence for Canadian MoneySaver published last November. In that article I mentioned two ETFs: Robo Global Robotics & Automation ETF (ROBO) – which I own – and Global X Robotics & Artificial Intelligence ETF (BOTZ). Both trade on the NASDAQ and each has just under $2.5B US in assets under management. ROBO has a 0.95% management fee and is based on the ROBO Gbl Robotic & Automat TR USD index. BOTZ has a 0.69% management fee and is based on the INDXX Global Robotics & AI Thematic TR USD index.

Since writing the article, a Canadian version of ROBO was introduced on the TSX by Horizons called Horizons Robotics and Automation ETF (ROBO.TO). It is still small with only $51M CDN in assets under management and has a management fee of 0.75%. As it approaches $100M in assets under management, this hedged fund could be of interest to Canadian investors wishing to invest in this theme in Canadian dollars.

But the latest addition was announced on February 22 of this year. It is called First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT), has just $3M US in assets under management and a fee of 0.65%.

According to ETF.com:

The fund tracks an index developed by the Nasdaq and the Consumer Technology Association, the Nasdaq CTA Artificial Intelligence and Robotics Index. The benchmark’s methodology selects stocks at the global level that meet [sic] have sufficient liquidity, at least $250 million in market capitalization and free float of at least 20%. 

While it is not yet a week old, ROBT is one to watch for those wishing to invest in this secular trend. Given the growth in assets under management (ROBO and BOTZ in the last three months combined have seen inflows of $1.7B US) and the growth in the number of funds, there seems to be considerable investor interest in this secular trend.

(If you didn’t see it already, Ottawa Share Club member Jan also wrote about disruptive technologies that include AI and robotics. More here.)

Note: these are not endorsements or promotions – conduct your own due diligence and see our disclaimer.

February 2018 content from the OSC meeting on retirement forecasting is posted

An extensive array of content is now available for planning your retirement courtesy of Fred May and Brad Forden who presented the material at the OSC session on February 13, 2018.

It includes Fred and Brad’s presentation, a link to Steven Brown’s Excel retirement forecasting tool, a link to Brad’s updates to Steven Brown’s tool, and four example forecasting scenarios that Fred and Brad presented at the meeting.

Please see the Ottawa Share Club members and guest page for the material (near top of the page) here.

Note: Brad is looking for feedback on the enhancements he’s made to Steven Brown’s forecasting tool. If you’d like him to work with you to do your retirement forecast and test the changes he’s made, please use the comments feature at the bottom of Brad’s page here and offer a paragraph description of what assistance you need. He is prepared to work with a couple of people only so please submit your request promptly.

Well, what really did happen to markets?

Further to my earlier post about some possible reasons for the recent correction in stock markets globally, I found a thoughtful explanation.

Ben Carlson of A Wealth of Common Sense, who I follow pretty regularly, posted his thoughts yesterday on his site.

Basically he thinks there isn’t a simple and satisfying explanation of causes for the pullback now.  He cautions investors that headlines tend to get blown out of proportion by financial news organizations.

He also makes the important point that anyone in the accumulation phase is now presented with an opportunity to buy good companies on sale.

Further, he predicts that this is not the beginning of a 2008-type crash. It is more likely a correction like we saw in the summer of 2015 (-12%) or the early part of 2016 (-13%).

Ben admits no one can predict what’s next:

The biggest thing to remember is that no one has a clue what’s going to happen next. Short-term market moves are controlled by human emotions, which are impossible to predict.

I couldn’t agree more.

That’s why I have done nothing during the correction and will monitor asset allocations until March 2018, when I reach my next self-imposed trading date. If stocks are still off their highs I may need to add to positions to remain at target weighting.

What just happened to markets?

Headline stories about the stock market pullback this week were largely focussed on the drop in the Dow Jones Industrial Average (less so on other indexes, but they were not immune). The year-to-date total return marked by the DJIA on January 26 was +7.77%. By the close on Friday, the DJIA had settled to +3.34% YTD, a drop of around 4%.

This is a relatively large drop given the low volatility and upward trending we’ve seen in markets in the last couple of years. By historical standards this is a mere blip, and 3.34% YTD total return still represents, annualized, over 35% growth!

I was in my car last night and caught a story on the news radio about the stock market pullback. The commentator didn’t really have a very clear rationale for drop – something about markets and the broad economy not being correlated….. The broad US economy is doing well, creating jobs and growing, but markets took a big pause.  Hmmm. I didn’t find that very satisfying.

A few minutes earlier I had read in WaPo the main reason that markets pulled back, and especially on Friday, was to do with the 10 year benchmark interest rate surpassing 2.8%, on its way perhaps to 3%. The case was made that a 3% benchmark rate will send a signal to some investors that bonds might be more attractive than stocks on a risk-adjusted basis.

I read another article this morning in the NY Times that makes a similar point and goes on to say there may actually be a connection between the pullback and the broad economy: expectations are that the broad US economy is going to grow at, say, 1.5% not the 3% promised by Donald Trump.

So maybe there is a decent connection between stock market indexes and the broader economy after all. Given how expectations affect spending and investment decisions so heavily – both in markets and in the economy at large – this really shouldn’t be a surprise. And the 10-year interest rate moves in large part due to expectations about inflation rates and the cost of money in the future. Inflation expectations may be climbing.

This tells me, perhaps, that expectations could well be shifting to lower future growth rates in the economy and to lower investment returns from markets. Nothing says these expectations will be proven correct, but it is worth noting.

It is also worth reminding that last year’s market performance is no guarantee of future performance. But even at a 3.34% total return YTD, the DOW isn’t exactly off to a bad start.

Three things to watch for markets in the near future

At the time of writing, pre-market stock trading in the US is showing minor declines on the three major stock exchanges.

The US government shutdown is but one factor, even if an extension is voted in for the next three weeks.

NAFTA negotiations are about to start their sixth round on January 29th in Montreal. Reports have it that US/Canada relations are acrimonious and may lead to the US serving notice of withdrawal.  In a recent move, Canada has filed a World Trade Organization (WTO) complaint against the US. Donald Trump is signalling his considerable displeasure with Wilbur Ross as Commerce Secretary.

A third factor coming back on the horizon is the US debt ceiling, which is expected to be reached in early March 2018. Some are expressing concerns that it is aligning closely with budget debates.

With an erratic White House at the “helm” and over-stretched stock market valuations in the US and Canada, what could go wrong?