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January Newsletter - Hello 2019!

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First, The Bad News from 2018

There is no way to describe 2018 equity markets as anything other than very dissappointing.


What Happened and Why?


It was the weakest year since 2008. Markets were dragged down substantially in the last 3 months due to higher interest rates, a slowing global economy, the US Government shutdown and continued trade tension between the U.S. and China.


While it felt awful to all of us, we don't feel that the economic/market fundamentals justified the sell off. We'll walk you through it below. Here are the returns for 2018.

This comes after 2017 returned +6.0% here on the TSX and an astounding +22.0% on the S&P 500.


Now, the Good News for 2019


So far, 2019 has jumped off to a pretty fair start. In the first 9 days of trading the markets have been up 7. TSX +4.5% and the S&P +3.0%. Far better than November and December combined.


And now, any time one takes a view of the future for equity markets we try to bring it back to the fundamentals that have historically been the drivers of return: recession risk, earnings risk and valuation risk. In light of these three factors it is hard to imagine the volatility of the fourth quarter of 2018 as anything other than a common correctoin driven by moderating global economic data that has been amplified by headlines and noise.


For the coming year, the view of the global economic environment is more moderate but still favourable. Global Purchasing Managers' Indices (as mentioned in our September Newsletter) as a measure of over all global economic growth, are in the majority positive, albeit not as strong as they were a year ago.

Essential to recognize however is that in the worlds two largest economies, China and the United States, manufacturing slowed in December. What is hard to ascertain is how much of the slower manufacturing growth can be attributed to uncertainty regarding the trade dispute between China and the US, and what would be indicitive of a broader economic slowdown.


Top of mind for investors today is not necessarily if but when will the next recession happen. Consensus among economists for the US is 2020. To that end, none of the typical signs of recession are present today. In our view that puts risk of recession in 2019 to be fairly low. Also keep in mind that if and when any of the indicators do turn negative, there is a significant lag in time until the equity markets feel the effects. As an example, using the yield curve as an indicator, the lag is typically a good 12 months from the time it inverts (possibly in the first quarter of 2019) and the first material signs of a downturn.


It should also be noted that in the past, abrupt corrections often result in substantial gains in the months that follow.


The Bottom Line


In summary, and as quoted by Philip Petursson our Chief Investment Strategist, "Investing is not an exact science. It is more so a probability-based exercised. And based on the market acitivity of the past quarter we believe the probability are to investors' benefit".


As always, if you would like to discuss any of these points and how they relate to your portfolios, we are here to help. Call us.