Market Watch – Oct. 26, 2018

North American Markets Rebound Thursday; Cannabis Stocks Slide

Equity investors breathed a sigh of relief Thursday as North American markets regained ground after an especially brutal start of the week. The Dow industrials added 402 points, the S&P 500 recovered 50 points, the Nasdaq regained nearly 3%, while the TSX eked out a 15-point gain.

Thursday’s recovery was especially good news for equity investors who saw a sharp sell-off both Tuesday and Wednesday as worries about global economic growth and downbeat earnings outlooks from bellwether U.S. companies negatively impacted markets from New York to China. On Tuesday the Dow fell almost 550 points before making up most of the ground in the final hours of trading, while the TSX touched its lowest point in six months. Wednesday was even worse, as the Dow fell 2.4%, the S&P declined over 3%, the Nasdaq entered correction territory, shedding over 4%, and the TSX tumbled 376 points. It’s also been an especially tough week for Canadian cannabis stocks, which have dragged down the health care sector since cannabis became legal in Canada last week.

In a widely anticipated move, the Bank of Canada (BoC) on Wednesday raised its interest rate 25 basis points to 1.75%. It was the fifth time that BoC governor Stephen Poloz lifted rates since mid-2017. The BoC also said its key interest rate will need to rise to a “neutral stance,” which many have interpreted as near 3%, to keep inflation close to target. Turning to Europe, the European Central Bank (ECB) confirmed its plans to wind down its program of quantitative easing by yearend, despite acknowledging Thursday that the eurozone’s economic growth momentum has fallen off. ECB President Mario Draghi said it was still unclear whether the slowdown is due to isolated factors-such as declining German auto production due to emissions standards-or more long-lasting issues.Volatility Returns to North American Markets

For the four days covered in this report, the Dow declined 459 points to close at 24,985, the S&P 500 shed 62 points to settle at 2,706, while the tech-heavy Nasdaq dropped 131 points to close at 7,318. In Canada, the TSX declined 546 points to end at 14,924.


Equities are fairly valued, but offer growth. We believe equities are fairly valued in the context of our long-term interest rate and inflation expectations. We emphasize ownership of high quality, well-capitalized companies that have a strong likelihood of sustaining and growing their earnings. As such, we have a bias toward companies with high barriers to entry, low leverage, and high cash flows. We also have a preference for companies operating in developed versus emerging market economies that are not heavily indebted.

(Big Picture – Bill Curry)

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