Stocks continued to reach new highs on optimism that the U.S. economy will accelerate next year. November’s rally was pushed higher on account of investor confidence that the U.S. government would pass a version of the Trump tax reforms. On top of the anticipated marginal stimulus that the bill would provide to the economy, the stock market is euphoric over proposed cuts in corporate income taxes. With the corporate tax rate likely falling from 35% to 22%, many S&P 500 companies would see bumps to their earnings in 2018. While Trump and the Republican-led Congress/Senate have failed to deliver on many of their election promises, investors are confident that the G.O.P. can rally around tax cuts (despite the potential impact on the U.S. deficit and debt). While we acknowledge that corporate tax cuts will provide a lift to 2018 earnings, we believe that the market has already priced most of this in. With the U.S. stock market up about 30% since Trump’s election, most of this good news is baked into the markets. We continue to focus on the fundamentals: elevated stock valuations; rising short term interest rates; extreme investor bullishness; liquidity concerns (caused by central banks unwinding quantitative easing); high corporate and government debt levels; and record low volatility. The bottom line is THAT FUNDAMENTALS MATTER and while the market may continue to go up in the short term, valuations and fundamentals will eventually catch up to stocks. Just like in 2000 and 2007 when speculators ignored dotcom valuations and U.S. housing statistics, investors who were patient and disciplined were ultimately rewarded. With this in mind, we continue to structure our portfolios defensively and prudently.

Amidst this overall optimism, the S&P Volatility Index (VIX) hit an all-time low on November 3rd. With so much geopolitical risk from North Korea, the Middle East, Brexit, NAFTA and the Russia investigation, we believe that it is only a matter of time before this trend reverses, and perhaps dramatically. In prior periods of similar complacency, the VIX doubled and tripled in a matter of days on negative news. In recent days, on Dec 1st, when news broke that Michael Flynn pleaded guilty and was cooperating with U.S. Federal investigators, the VIX spiked 30% in a matter of minutes. We believe patient investors in ETFs that track the VIX should ultimately be rewarded.

In Canadian markets, we saw disappointing performance from some of our favoured Canadian energy names. Despite oil’s strong rally in November, when the commodity (as measured by WTI) moved up from $54.50 to $57.40, many Canadian energy stocks suffered, among them were Crescent Point Energy and Trinidad Drilling, which were down 10.3% and 7.6% respectively. In talking with traders and analysts, U.S. hedge funds were in the market shorting Canadian small and mid-cap names, while Canadian investors were also selling to trigger capital losses for year-end tax purposes.

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