Some Longer Term Considerations

Stock Market Outlook

In terms of market performance, the last week has been a standout in North America. The S&P 500 and the Dow Jones Industrial Average (DJIA) have both hit new all-time highs – not for the first time in 2017. However, most significantly, the TSX finally entered all-time record high territory. However, unlike the U.S. where charts of the S&P 500 and the DJIA have shown strong linear growth throughout the year, the TSX’s new high simply saw it surpassing its previous high in February of this year.

We would remind readers that from the point when cyclical bull markets in the S&P 500 and the DJIA peak, there is normally at least a six-month lag before the TSX in turn peaks out. That is because of the normal late cycle strength in the commodity based sectors (oil and gas, mining and agricultural products) which have a much greater impact in the TSX than is the case with the two U.S. indices.

In early October, we published our Quarterly Market Outlook and in our last Strategy Note, we pointed out the encouraging fact that the ECRI Weekly Leading Indicators (WLI) had reversed to the upside over the preceding two weeks. That reversal has now carried through to the upside for a further two weeks. To recap: the WLI hit their fastest growth rate at +11.9% at the beginning of February this year but then declined steadily to a low of 0% five weeks ago before recovering steadily to +2.8% in the latest reading. 90% of bear markets over the last 50 years have been associated with recessions. In almost all cases, U.S. recessions are associated with a reading for the WLI of -10%. Thus, the reversal in the ECRI to the upside is very comforting in that means that there is little likelihood of a recession in the U.S. until the second half of 2018 at the earliest. With the normal cyclical lag for the TSX, we are hopeful that we could see some very satisfactory gains over the next year in the TSX. Our conservative target for the TSX has been 16,000 (a level recently exceeded) but we suggested that this could well prove to be quite conservative if the 2017 year end oil price moves back to the $60 plus area a barrel. We still believe that global oil inventories are falling rapidly to normal levels and, assuming that Organization of the Petroleum Exporting Countries’ (OPEC) November meeting results in agreement to keep current production quotas through to the end of March, we are becoming more confident that oil will hit $60 a barrel. The recent rally has taken it to $55 a barrel already and $60 a barrel now appears achievable.

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