The key feature of 2018 has been the resumption of volatility on the financial markets. As a result, many investors have experienced a wide range of emotions. So we think it’s a good time to provide a market update.
Direction of interest rates
On December 19, as expected, the U.S. Federal Reserve (Fed) raised its key rate by 0.25% (the fourth increase of 2018). Even though the Fed has reduced the number of rate hikes planned for 2019 from three to two, it has maintained a restrictive strategy. Moreover, it will continue to unwind its balance sheet at the planned rate. It has disregarded investor concerns about global economic growth and is focusing exclusively on the U.S. economy.
Market decline or correction?
As of this writing (late December), the U.S. stock market is down 9.2%, its lowest year-end return since the 1930s. The U.S. economy is definitely slowing, but remains relatively strong. The risk of a recession south of the border in 2019 is therefore low. The risk of a global recession is also minimal for the time being, but conditions are deteriorating. The Professionals’ Financial team thinks we are experiencing a market correction, rather than a bear market, which is defined as an index decline of 20% or more from recent highs. Our specialists think the situation should stabilize in 2019. In the meantime, the market will be wary.
Rising dividend yields
Since the start of the year, many stocks have fallen to quite affordable levels that have increased their appeal. Moreover, studies show that more than 40% of the total return on equities comes from the dividends they generate. The recent decline in the price of many stocks has made their dividend yields quite attractive.
Economic conditions are currently good, but with the Fed’s latest decision the uncertainty has increased. Many experts share our opinion that there should be no recession in the United States in 2019 and the markets should sort themselves out. The current situation represents an interesting buying opportunity. It is quite possible that, after the two rate hikes announced for 2019, the Fed will take a break from its monetary tightening. As for the market, it thinks the Fed won’t raise its key rate in the year to come. Who will be right?
Keeping a close watch
Over the short term, the uncertainty will persist. The investment team has therefore decided to reduce the equity weighting of the FDP Tactical Asset Allocation Private Portfolio to the 55% target (a 15% equity reduction) in order to protect investor capital. We will continue to monitor the situation closely and will reassess the portfolios’ positioning on a regular basis.
You can therefore stay on course with complete confidence, relying on the investment policy put in place by your experienced Professionals’ Financial Advisor. It faithfully reflects your objectives, priorities and investor profile and has been structured to go the distance.
François Landry, CFA Senior Vice President and Chief Investment Officer