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September turned out to be a mixed bag for markets, with the Dow and the international EAFE indexes picking up a few percentage points each, as the TSX and NASDAQ slid about 1% apiece. Markets saw upward pressure led by the healthcare and technology spaces; on the other hand, the financial and consumer discretionary spaces tempered the gains, leading to a flattish month.
What a month for cannabis stocks, though! Among the big headlines in September were the well-publicized business deals between Canopy Growth and Constellation Brands to make marijuana-infused beer, immediately followed by talks of Aurora Cannabis teaming up with soda makers to make pot pop. The whole sector has been on fire lately, nearly doubling in the span of four weeks. We have been cautious on pot stocks, and we continue to be, as every headline that comes out of the sector is surrounded by so much investor excitement that it’s hard to see where fair value ends and enthusiastic overbuying begins.
With legalization day only two weeks away, we’re suggesting taking some of the gains; however, given that we’ve made it to legalization day at all, and with only a few hiccups, the cannabis market is obviously here to stay. It might be a bit of a bumpy road ahead, with the recreational pot sector still being this new and interesting thing… but, Prohibition ended ninety years ago, and the booze market’s still pretty healthy!
Finally, some news coming in right under the wire: A new deal has been signed by Canada and the US to replace NAFTA, now called the USMCA. While the agreement doesn’t break any new ground on the North American trade front, mostly just outlining new Canadian and Mexican concessions to the US for the purposes of maintaining international trade, perhaps Justin Trudeau said it best: “no deal is better than a bad deal, but when you see a mediocre deal, you take it and run”.
Going into October, short-term fundamentals look positive, with end of year targets pointing to 3% growth for the TSX in Canada and 1.4% for the S&P 500 in the US. However, our analysts have noticed medium-term (3-6 months) indicators starting to deteriorate, which are the early warning signs for some selling action in the last weeks of 2018, going into 2019. Throughout October and November we will be shifting growth- and value-based investments into more defensive names, so that while the market shakes itself out, you will be getting paid to wait!