2018 has been one heck of a ride for investors, with the first part of the year taking us to ever greater heights only to see the fall plunge us back to ground zero wiping out double digit gains. In fact, this year’s big swings in the stock market are at their highest level since 2011.
So what happened?
Technology stocks soared and then plummeted taking the markets with them
Technology stocks have been market leaders over the past few years, which has led to markets becoming more narrow. Until September of this year, only about a handful of technology stocks--Amazon, Apple, Google, Netflix--were responsible for the strength of the markets and the all-time highs they reached. What we’ve since learned is that tech carried the market even though many stocks in different sectors were trading in correction or bear territory. The only reason the U.S. markets aren’t down lower today is because of the gains generated by tech stocks in the first part of the year. People knew the tech run would end at some point. We just didn’t know how or when. Now we do. On the flipside, tech is now over-sold. Don’t be surprised if in the not so distant future, these stocks return to the upside.
Tariffs and tradewars
In March1, when President Trump first announced the first round of tariffs on goods coming in from China, triggering a trade war and escalating tit-for-tat tariffs between the two nations, investors were initially lulled into a false sense of security because the markets were still going up. The impact took a few months to show itself, but it has and the markets are feeling it. By November, the majority of CEOs were talking about the negative impact of tariffs and input costs2 with analysts during their third-quarter corporate earnings calls. Prices are going up, inflation is rising, companies are scouting new locations to drive down costs. However, counter to what President Trump had hoped, they aren’t leaving China to set up shop in the U.S. They are looking to places such as Thailand. Bottom line: no one wins in a trade war--especially not investors.
NAFTA becomes USMCA the Canada-United States-Mexico Agreement
Maybe the only thing that any of the three nations gained from the new agreement is certainty, or at least as much certainty as is possible in these uncertain times. For Canada, we avoided a protracted fight with our largest trading partner that would have cost us future business investment into the country from abroad. Did anyone really win? I don’t think so.
The oil saga continues
Oil prices fell off a cliff from about $70 a barrel to about $50 and Canadians are worried, for good reason: oil has long been the backbone of our currency. At one point, the oil sector accounted for about 25% of our stock market. Now, it’s closer to 20% . But who benefits from high oil prices other than oil companies and their suppliers? Higher oil prices just increase prices for businesses that then pass those costs on to consumers. I think low oil prices are a good thing and we should get used to it and adjust because technology has made it more accessible than ever. Think about it, thanks to hydraulic fracturing, the U.S. is now one of the world’s biggest oil producers. Oil is everywhere and low prices are here to stay. As an investor, I largely stay away from oil stocks unless they pay a healthy dividend.
Cannabis stocks went crazy high before being sold off
The story of cannabis stocks is almost exactly the same as that of tech stocks in 1998/1999. I remember in the days of the tech boom getting calls from people saying, “Allan my buddy told me to buy anything.com.” My reaction was, “Who the heck is anything.com? What do they do? They are going to leave the market just as quick as they entered.” Twenty years later, it’s cannabis stocks which got a big boost from legalization in Canada and the hope on the part of investors that these companies are going to get major investment from other sectors. For example, there was talk that Coca Cola might be developing cannabis infused beverages. The reason they fell is because it’s simply too soon to tell if that will happen. Just as with the tech sector in the late 1990s, there will be winners and losers but it’s too early to see who those will be. Share price is not going to grow based on recreational use. It will be the companies that partner with and get investment from other sectors that will last and grow into their market valuations. My best advice is to wait and see how the market evolves. That said, for those investors who really want to buy in, I recommend sticking with the big three: Canopy Growth Corp., Aurora Cannabis Inc., and Aphria Inc.
Gold is out, the U.S. dollar is in
This was another interesting development in 2018. Typically, when there is market volatility and geopolitical unrest, investors flock to gold, something solid, for stability. This is no longer the case. Instead, global investors are buying the U.S. dollar and Treasury bonds. Despite all the chaos in the oval office, the U.S. still has the world’s strongest currency and no one is challenging this dominance.
Mueller, the midterms and the Donald effect
The Mueller Investigation into the Russian government’s interference in the 2016 U.S. presidential election continues to make headlines but so far has had no bearing on the stock market, largely because many people believe President Trump will not be impeached or removed from office. Investors are more focused on what is happening, which is the trade war with China. The midterm elections, on the other hand, did affect the markets because something did change: the House of Representatives is now controlled by the Democrats. Come January, President Trump will have to answer to these newly elected officials who have already announced they want to see his tax returns. This will ramp up political and market volatility. Sitting Presidents always impact the markets but we’ve never seen the likes of what’s happening in Washington right now and it’s because of President Trump, his 3 am tweets, combative nature and unpredictability.
So that's 2018. Buckle up for 2019. Happy New Year!
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