Signal and noise are terms used to describe how investors should perceive news flow, separating what is important from what is not. Lately, this skillset has been called upon frequently. From potential peace on the Korean peninsula and the revocation of the Iranian nuclear deal to a significant deterioration of US / Canada relations and more concerns in Italy and Turkey. Against this backdrop, economies continue to perform well with accelerating wage growth. Equities were mostly steady, particularly in North America where oil stocks rebounded, pushing the TSX into positive territory for the year. In the US, technology shares continued to move higher while the rest of the market struggled.
Domestically, there has been more drama than Canadians are normally accustomed to and quite frankly than we would like to see. Trudeau and Trump’s previously collegial relationship appears to have soured, and we have entered a trade dispute that threatens near-term economic performance and potentially NAFTA. Trump’s approach to rip up old alliances is causing consternation among all western allies. One would hope that cooler heads will prevail although evidence of this is currently lacking. These developments require thoughtful inclusion in any analysis we do of individual company prospects.
To add further drama to the last few months, the federal government took the drastic step of nationalizing a pipeline in an attempt to end the stalemate between Alberta and BC. At a time when oil is surging due to OPEC / Russia co-operation and Iranian restrictions, Canadian oil producers were at risk of not participating due to an inability to get their product to market. Clearly this was viewed as untenable given the government’s decision, but it remains disappointing that a private market resolution couldn’t have been reached. More recently, Enbridge’s Line 3 pipeline replacement approval provides further potential relief to Canadian oil producers. In sum, these developments provides a bright spot to a Canadian economy in need of some positive news.
Alberta and BC were not the only provinces to make headlines. In Ontario, status quo was not going to continue politically, however, nobody would have predicted six months earlier that a populist Doug Ford would win the election. An immediate challenge to this new leadership is what the actual policies will look like and how they will impact the budget and spending. This said, it would appear on the margin that the business climate in Ontario should skew more positively.
As the world reels from Trump trade policies and rhetoric, stocks remain resilient. Trade disruption remains a big risk and something we will watch closely. Interest rates are also a potential risk on the horizon although their move higher has slowed. Central banks are providing as much transparency as possible as to how and when they are likely to raise rates. Historically, rising rates have had a dampening effect on equity markets although the need to move off of abnormally low rates is definitely a priority.
This type of market environment can be challenging, however, the key to our approach is to remain grounded in fundamentals of individual companies and not getting caught up in the tweet of the day. While all information needs to be considered, we must not lose sight of the bigger picture. Hopefully you are enjoying some quality time with your families and friends over the summer and rest assured that we are busy monitoring all these developments and separating the signal from the noise.