March 22, 2019
Making Cents of the Markets
Be in the Know
Markets ended the week down only slightly with the S&P 500 falling 0.8% and the TSX dropping 0.3%. The main news this week was the Federal Reserve (Fed) meeting on Wednesday, which set up a more dovish (easier policy) tone. Back in December, the Fed had forecasted approximately two rate hikes in 2019, with more to come in 2020 and 2021. However, they are now forecasting no rate hikes in 2019, with only one hike forecast in 2020, and none in 2021. What a difference a few months makes! Growth expectations were likely part of the reason, as the 2019 forecast for the US was lowered to 2.1% growth, and the 2020 forecast was lowered to 1.9% growth. A slowing global economy (specifically China and Europe), was cited as the main detractor, whereas the healthy labour market was a positive.
We received more economic weakness statistics from overseas, with the German manufacturing index being the major sore spot, contracting for the third month in a row. While Germany narrowly avoided a technical recession last year, it may not matter much. It looks pretty obvious that the export-heavy nation is struggling. That news, in combination with an inversion of one of the yield curves, is something you’ll see written in headlines for the next little while. Specifically, the 3-month and 10-year treasury rates flipped, with the longer term offering a lower yield than the shorter term. A reminder: the signal does not mean imminent recession, as the lag time is on average 16 months, and stock market returns in 18 to 24 months post inversion is 13.7%. More in our chart of the week below. Historically, the market peaks after inversion as well.
One thing that provided relief on Friday was that the US housing market appears to be recovering. Existing home sales jumped 11.8% in February, as a strong labour market, a drop in mortgage rates, and wage growth appear to be underpinning the housing market. This was much stronger than the 3.2% growth in sales that was expected by economists. A US recession does not appear imminent.
Our mandates hold a moderate equity exposure for now as the market settles out from the recent yield curve inversion, but we have included more defensive positions over the past few months to increase the dividend yield and also be ready for this type of situation. The Fed and central banks around the world are in an accommodative mode which is positive for markets. The trade war worries remain but are dissipating with a likely meeting next week between the US and Chinese trade delegates, with the potential for a deal in April/May. We have had decent corporate earnings, better US economic data than a few months ago, and Brexit is being kicked down the road. Global growth slowing, tariffs in place for longer than expected, the yield curve inverting, and tough comparisons for 2019 Q1 are things we are paying attention to on the negative side. While it is a mixed bag of data and news, we should learn more over the coming weeks about some of the major headline issues.
We believe that we are in late cycle expansion right now, not in a recession. Towards the end of a cycle you typically have more volatility and certain sectors will outperform. The last leg tends to have highly positive returns, so although we are cautious, we believe there is still upside to this market over the next 12 months. That being said, we have our stop-losses in place as well as our recessionary indicators we are always watching. The yield curve inverting is one of those indicators, but combined with the labour market, housing market, credit conditions, consumer spending, manufacturing readings, and corporate earnings, we think the positives outweigh the negatives at this time. Again, with the recent inversion, we may experience some short term volatility but if history tells us anything it says not to panic and understand that a recession doesn’t hit for some time while markets move higher. Also, if a decent trade deal is announced sooner rather than later then it is possible that global growth picks up once again. This is why we feel active management is so important; we don’t know the outcome at all times but be assured that we are assessing news that comes out and making necessary decisions for the portfolios.
Chart of the Week
From our Raymond James Equity Portfolio & Technical strategy team, summary of yield curve inversions since 1954 compared to the S&P500:
Tax Receipts Update – March 22
Tax time is upon us and most of the receipts and reports have been sent. The Realized Gain Loss reports, which are infinitely more useful than the T5008 trading summaries, are being sent early next week. The T3’s were just generated last night and are on their way. The T5013’s are still to be generated but we expect them next week as well.
Beyond the Markets
Canada’s journey to the 2019 CONCACAF Gold Cup as well as the 2022 FIFA World Cup comes into focus this Sunday, March 24 as they face off against French Guiana in a crucial game. The national soccer team has posted a perfect international record in 2018 with four wins under the coaching of John Herdman. It is sure to be a spectacle, so pick up your tickets and cheer on Canada’s team!
Purchase your tickets here.
Listen to this week’s Making Cents of the Markets on CKNW. We talked all about surging markets in uncertain times, Vancouver real estate, and the federal budget for 2019. Listen here.