Market Update - July 2019

The markets were relatively quiet in July, with account values for the month mostly unchanged.

Major themes for the month included: The Federal Reserve lowering interest rates for the first time in a decade, renewed trade talks with the US and China (which now look to be hitting a roadblock), and lastly the reporting of second quarter earnings by major companies in both Canada and the US.

The July corporate earnings reports have been unexpectedly strong (companies reporting their April-June earnings results) – with over 70% of companies having beaten expectations in the US and only 18% missing their targets. The results in Canada have also been better than expected, with 63% of companies beating their targets and only 22% missing.

The beginning of July saw a trade delegation from the US travel to China to try and work out a deal. For most of July, this was viewed as a positive – however newly announced tariffs may present further challenges.

While the first 30 days of July saw slight increases in both Canada and the US stock markets – most of these gains were given up on the final day of the month. The Federal Reserve in the US chose to cut interest rates by 0.25% on Wednesday. This decision came as no surprise - as markets were anticipating with near 100% certainty that there would be at least one rate cut this summer. However, stock prices had been rising over the last two months on hopes that the US would cut rates multiple times. The message on Wednesday seems to suggest that this would not be the case, and market reacted negatively to the news.

In Canada, future interest rate cuts are uncertain. However, longer term rates have started to fall (predicting no future raises on the horizon). The anticipation of lower future rates has had a negative impact on preferred shares – which in some cases have seen declines of up to 20% from where they were in March. This isn’t the first time we have seen this kind of downturn in preferred shares (the same thing happened in 2015 when the Bank of Canada lowered short term rates to help offset lower oil prices). As back then, we see these declines as temporary – and have started to increase our preferred share holdings. While it is difficult to determine when interest rates will rise again – we know with some certainty that it is an eventuality. Should that happen, we think preferred shares would stand to benefit.

That’s all for now! For those looking for more detail on where the economy is headed - we will be publishing our quarterly newsletter in the coming weeks.

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