First Quarter Commentary

The post election stock market rally extended its gains into the first quarter. The US economy continued to gain steam as corporations reported accelerating revenue and earnings growth. Canadian stock market gains lagged US stock market gains related to weakening oil prices and tepid economic growth.

The Federal Reserve Board hiked short term rates twice in three months, unusual in this cycle. Despite this, the Federal Reserve Board intimated that there would be additional rate hikes during 2017. The Consumer Confidence Report and the ISM US Manufacturing report have both sent out positive signals with respect to economic growth. The latter report provides an indication of future growth rates for industrial production. Thus, both economic and corporate fundamentals appear to be in good shape.

The Trump agenda continues to dominate the daily news. For the Trump team, winning an election is starting to appear relatively easy compared with governing. President Trump’s hastily conceived healthcare bill, intended to replace Obamacare, did not even achieve a floor vote in the House of Representatives despite a Republican House majority. There is no guarantee that the Trump team will be able to pass legislation and advance their agenda within their original planned timeframe. President Obama required a full year to pass his landmark healthcare bill, even with a filibuster proof Democrat majority in both the House and Senate. Under optimal conditions, governing and getting laws passed can be a messy process.

It is anticipated that President Trump will now shift his focus to implementing his priority policies such as tax reform, deregulation, and infrastructure spending. These initiatives have been the primary catalysts for positive stock gains since the election. Like President Obama before him, President Trump has begun to use executive order to enact laws and ensure his agenda is being carried out. He has used executive order privilege to reverse some of President Obama's environmental regulations. We would not be surprised if he signs more executive orders to move his agenda along.

The President has been talking a good game, but now that he has been in office for over two months, he needs some legislative wins. After losing the healthcare battle, we should expect him to tackle issues where he can successfully move legislation along. Infrastructure spending is an area where there is bi-partisan support. Tax reform can also happen, but the scope of the reformation will be more limited than what was originally envisioned by the President and the Speaker of the House.

Stocks have had an excellent run since the election. It has been a while since stocks corrected and we would not be surprised if this were to occur in the near term. Stocks are not cheap based on earnings but they are fairly valued based on based on book values and dividend yields. Stock market investors have responded positively to the Trump agenda, nonetheless uncertainty related to their ability to pass legislation may trigger market volatility. Corrections are a normal, albeit unpleasant, part of an investment cycle. We continue to prefer equities over bonds but we plan to trim equity positions as stocks push to new heights. This is a tactical decision to boost client cash positions to take advantage of any weakness in stock prices.

Canadian Bonds have provided investors with low single digits returns over the last couple of years. With no upcoming change in interest rates, bond returns will remain anemic. Accelerating growth in the US economy may lead to an increase in interest rates with a potential for further dampening of bond returns. The clients of Condor Asset Management are largely invested in shorter term bonds, limiting their exposure to interest rate fluctuations. We currently view bonds as a stable repository for portfolio assets, whilst acknowledging their potential for reducing overall portfolio returns.

By providing strategic personalized portfolio diversification, over the past five years, Condor's clients have enjoyed returns that significantly outperformed the Canadian stock market. We look forward to welcoming new clients. Please refer us to your colleagues or friends who may be looking for a personalized investment service.