Last Month in the Markets – September 1st – 30th, 2017
What happened in September?
September was a very strong month for North American markets and oil. The Canadian dollar ended the month almost exactly where it began and gold was considered the ‘loser’.
As with all compound situations, and with economics specifically, many factors contributed to the overall market performance, individual indices and stocks, and foreign exchange values and commodity prices.
- As always, politics played an important role. The easing of tensions (temporarily or permanently?) between the United States and North Korea contributed to the fall in the price of gold. When uncertainty looms, capital flows to the safe-haven of gold, and when the situation is more certain, and markets and company stock prices are less influenced by political rhetoric, the investment in gold falls.
- Monetary policy affects more than just interest rates and in the case of Canadian and American equity markets, the predicted actions of the Bank of Canada and the Federal Reserve suggest a favourable environment “for business”.
- The expectations for a rate hike have lessened. In Canada, the likelihood has fallen to below 33% according to the Globe and Mail. In the U.S., the current focus of the Fed is to reduce its bond holdings as a change in short-term interest rates could dramatically affect the value of its longer-term bonds. The Fed does not want to be seen as profiting or creating profits for others while it sells off some of its bonds.
- There has been significant chatter, based upon real concerns, regarding the rising value of the Canadian dollar.
- Most Canadian investors will ultimately spend their investment earnings, and any capital currently invested, in Canada in Canadian dollars. Therefore, any investments in U.S. equities that generate U.S. dollar earnings will have those earnings reduced by foreign exchange losses as the Canadian dollar rises and the U.S. falls.
- Also; the rising Canadian dollar makes Canadian exports more expensive for American buyers, which could lead to reduced sales, lower profits, and therefore the lowering of share prices. The good news, for now, is that the Canadian dollar’s rise has slowed and essentially stopped in September. And if it has peaked, at least it has peaked just-in-time for Canadian Snowbirds to purchase their vacation/spending money.
- Regarding oil: Several events and situations are conspiring together to raise the price of oil.
- OPEC, led by Saudi Arabia and Russia, has recommitted (again) to curtailing supply and reducing reserves to drive the price upward.
- Hurricane season in the U.S. gulf coast has slowed productions, shipments and refining,
- The healthy U.S. economy has demand at the ready.
What’s ahead for October and beyond?
- Expect monetary policy in both Canada and U.S. to affect Canadian investors in the short and medium term. Despite the indicators that rate hikes might be less likely, as we exit the ultra-low interest rate environment, and bonds are sold-off by the Fed, a long-term strategy that accounts for this inevitability will continue to be valuable.
- Depending on the extent of U.S. corporate tax reform, that is just beginning to be announced, this move by the Republican President and Republican-controlled Congress could cause market changes for American stocks.
- In Canada, the effect of changes to small business taxes, income sprinkling and inter-generational ownership transfer could have a much higher impact for those directly affected (professionals, healthcare professionals, business families). We will continue to watch and update you as needed.