This week was one that brought a little more clarity. The US mid-term elections were on Tuesday and the markets rallied on Wednesday knowing that congress is now controlled by the democrats and the senate is controlled by the republicans. The US Fed spoke Thursday and they indicated a continued rate increase path. As a result the markets sold off a bit Thursday and Friday.


Regarding the mid-term elections, there are reports that say a mixed Washington creates difficulty for the president to pass his agenda and in doing so takes some uncertainty out of the markets. When uncertainty is removed the risk premium goes down and risk assets increase as there is less of a discount applied.

China was hoping for a softer environment to negotiate the trade deal with and they may have got it.

At this stage only time will tell how things progress. We continue to believe that the trade issues will continue to get resolved and President Trump will look to chalk up wins going into the next election cycle.

Those are the headlines however what happened economically?

The Facts:


  • UK car sales were down 2.9% compared to -20.5% previously
  • US Markit composite and services PMI were up
  • US Markit non-manufacturing prices, new orders, employment and business activity and PMI were all lower but still above the 50 mark.


  • Germany composite and services PMI were lower but still above the 50 mark
  • US retail sales as measured by the redbook year over year was up 6.1% versus 5.9% previously
  • Job openings in the US fell to 7 million from 7.3 million however that is still greater than the 6.1 million unemployed workers


  • Germany Construction PMI fell below 50 which indicates a contraction to 49.8 from 50.2
  • US mortgages applications fell 4% from -2.5% previously


  • US Jobless claims came in at 214k vs 215k previously
  • Canada housing starts year over year came in at 0.2% from 0.4% previously
  • China exports year over year up 15.6% from 14.5% previously
  • China  imports year over year up 21.4% from 14.3% previously


  • US producer prices up 0.6% from 0.2% previously, the most in a month since Sep. 2012.

We would also like to share this chart regarding Canada, US and German household debt to income.Source:


While there is much uncertainty brought upon the market by political battles in the US, a rise (but unlikely in our opinion) of risk of presidential impeachment, trade disputes and the resignation of Jeff Sessions from the Attorney General position at the request of the president, we think that the labor market will continue to drive up inflation costs and this will cause the US Fed to continue to increase interest rates. There will likely be less transparency to the pace and direction of interest rate increases going forward which will confuse market participants and cause more volatility.

In summary we saw the US mid-term election results as positive for the markets. We expect trade tensions to be resolved over the next year. US labour markets are tight and the US consumer is looking to be in good shape. The chart above of the household debt to income levels, as of 2017, shows Canada at 178.1 while the US and Germany are at 108.7 and 93.3 respectively. We believe the US has more upside than downside risk as does Germany however we view the downside risks in Canada to be stronger than the upside potential.

Wednesday we put client money to work as the mid-terms gave us more clarity about Washington going forward and that coupled with October being a particularly nasty month we feel it was a good opportunity. The focus was on currency hedged S&P 500 with some Canadian industrials and German exposure.

Weekly Wealth Tip:

This week brought the lesson of knowing your underlying investment.

I talked with a gentleman this week about a fund that he invested in and he said that it paid an 8% yield consistently and that the fund was a managed income fund and is offered through a bank branch.

When interest rates are around 2% income funds, in our opinion, an 8% return is generated in one of two ways: leverage or return of capital.

In our view the fund is not likely to have been using leverage as it is available to the public and therefore the yield is likely a return of invested capital. 

He was unable to describe the investments within the fund, the exposures and risks associated with it.

A deeper understanding of this product is needed and importance should be placed on knowing what the underlying investments are, the economic exposure of those assets and other risks. Once the exposures and risks are understood, that should be compared with the market outlook and asset allocation, if appropriate, can happen at that stage.

An investor should avoid judging a fund’s merits based solely on yield and historical returns. Therefore know your underlying investments

Until next week.

Trevor Dale, CFA