Stock markets off to a good start in 2019
After a sharp pullback in late 2018, stock markets began the new year on a very positive note. The markets were reassured by the more conciliatory discourse of the chairman of the U.S. Federal Reserve and by the continuation of negotiations between the United States and China on a new trade agreement.
Focus on the past month
Overview of global equity markets*
- Benefiting from the oil price rebound, the Canadian stock market had an excellent January, with the S&P/TSX rising 8.7%.
- Wall Street also had a strong month, the S&P 500 and the Nasdaq gaining respectively 4.2% and 5.9%.
- International stock markets posted good results as well, with the EAFE Index climbing 2.9%.
- Emerging markets were up 4.9%, while China climbed 7.2%.
*All the percentages in this section are expressed in Canadian dollars.
- The Fed chairman adopted a more reassuring tone in January, suggesting that there would be a rate-hike pause and that the balance sheet reduction program would be halted if the economy shows signs of slowing.
- The partial shutdown of the U.S. federal government ended on January 25, 2019 following a temporary compromise agreement. However, another shutdown could occur if a consensus cannot be quickly reached on funding for the wall that President Trump wants to build on the U.S.-Mexico border.
- Senior officials from Washington and Beijing are still in talks to arrive at a trade deal before March 1 in order to avoid the imposition of additional U.S. tariffs on Chinese imports. Since many companies are signalling that the tariffs in place are already hurting their operations, it is in the interest of both superpowers to find a solution soon for the good of the economy.
- The International Monetary Fund lowered its global economic growth forecast for 2019 from 3.7% to 3.5%, which is still a solid performance.
- US. job creation was very strong during the month, with 304,000 new jobs created, versus expectations of 165,000.
- Government of Canada bonds across maturities posted a return of 0.3% for the period. (Source: Canaccord Genuity)
Performance of our funds
Although they recovered part of December’s market decline, our Funds slightly underperformed their benchmark indexes in January. However, their relative performance was trending positively in early February.
Our strategic monitoring
Continued trade tensions between the United States and China remain the main risk to global growth, as the end of the 90-day truce between the two countries approaches and an agreement is still not in sight. Here are some other factors which could harm the economy and the markets.
- The possibility that the U.S. Congress will refuse to ratify the new trade agreement between the United States, Mexico and Canada (USMCA).
- Concerns about the political and economic situation in Italy and fears of contagion to the entire euro zone.
- Problems related to Brexit and the uncertainty that this is causing in the U.K. and in Europe.
- The spectre of another partial federal government shutdown in the United States and the economic slowdown which could result.
Three fundamental indicators changed direction in January.
U.S. New Orders Index
U.S. new orders rebounded and growth of the U.S. money supply accelerated.
Global Purchasing Managers’ Index (PMI)
This index is falling because of the marked slowdown in global growth.
The decline in this indicator is due to the downward revision of earnings forecasts.
After the December 2018 market decline, we increased the equity weighting to 60% in the FDP Tactical Asset Allocation Private Portfolio. For now, we are still bullish on the stock market, while being aware that it is quite late in the current cycle. Pending the results of the negotiations between Washington and Beijing, we are maintaining our strategy of slightly overweighting equities in our Private Management approaches, for, among others, the following reasons:
- Economic conditions are favourable, the risk of recession is low and the threat of uncontrolled inflation is minimal.
- Corporate revenues and earnings growth is sustained.
- Stock market valuations remain reasonable since the sharp market pullback in the fourth quarter.
François Landry, CFA Senior Vice-President and Chief Investment Officer
The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.