Global stock markets continued to rise in January, before falling in early February and then stabilizing. World economic growth remains solid and forecasts call for growth to continue this year.
At January 31, 2018, most fundamentals were positive or neutral, such as U.S. new orders and job creation. The risk of recession is still low at present and the main source of concern remains the high level of investor complacency.
Market situation at January 31, 2018
- U.S. stock markets rose sharply in January, with the S&P 500 up 5.7% and the Nasdaq gaining 7.4%. Tech stocks led this market rally south of the border.
- In Canada, the basic materials and banking sectors delivered strong returns, but they were not enough to keep the S&P/TSX in positive territory. The Canadian market’s benchmark index ended the month off 1.6%, dragged down by energy, telecom and utilities issues.
- International stock markets did well during the month, with emerging markets up 6.7%, while the Japanese and European markets rose 1.5% and 1.1%, respectively.
- The rise in interest rates pushed bond prices down, resulting in a negative return for this asset class.
- The Canadian dollar appreciated slightly in January, from US$0.796 to US$0.812.
- The price of a barrel of oil ended the month at close to US$65.
Focus on key events
- After falling to 5.7% in December 2017, its lowest level since 2014, Canada’s unemployment rate rose slightly in January to close the month at 5.9%. This increase is due to the net loss of 88,000 jobs resulting from the abolition of 137,000 part-time jobs and the creation of 49,000 full-time jobs during the month.
- In mid-January, the Bank of Canada raised its policy rate to 1.25%, basing this decision on the fact that all of its closely watched economic indicators were positive.
- In the U.S., the annualized gross domestic product grew by 2.6%, which was below expectations. However, durable goods orders were stronger than forecast and the Purchasing Managers’ Index (PMI) rose.
- U.S. companies started reporting their earnings for 2017 and they were generally better than expected.
- Global stock markets fell beginning on February 2, with the S&P 500 Index particularly hard hit, tumbling 10% from its January 2018 high in the space of a few days.
Risks to watch closely
- The monetary policies of the major global central banks will influence market trends in 2018. Although they have yet to announce anything in this regard, the European Central Bank and the Bank of Japan could put in place less accommodative measures. In Canada and the United States, further rate hikes are expected this year. Note that according to a Morgan Stanley study, a too-rapid increase in rates by central banks is one of the three factors that can end a bull market.
- If Canadian monetary policy is tightened too quickly, this would likely have a negative effect on household debt, which is already at a high level.
- Certain geopolitical risks are still very real, including the continuation of the trade dispute between the U.S. and China, the protectionist agenda of the U.S. administration and tensions between Washington and North Korea.
Latest developments in February
- The stock market correction was the first in two years. Market volatility had been very low in 2017. In addition, investor confidence reached its highest level in the past twenty years.
- Investors are concerned about the return of inflationary pressures, which impact interest rate levels.
- Moreover, the swelling of the U.S. budget deficit caused by the tax cuts is raising questions among financial analysts.
In our view, the return of volatility is normal, considering the duration of the stock market cycle. The positive outlook for the economy and for corporate earnings should favour attractive returns in 2018. However, we can expect more volatility this year compared with 2017.
The main risk concerns the pace of interest rate normalization. A sudden jump in rates from current levels could cool investor enthusiasm.
A glance at our portfolio returns
Despite the fact that the appreciation of the loonie against the U.S. dollar has negatively impacted the performance of the balanced portfolios, they still posted a positive return for the first month of the year. As for bonds, they ended the month in negative territory, with bond prices dropping following the rate hikes. .
The positioning of our Private Portfolio Management and Private Securities Management portfolios over the next few months will largely depend on the pace of monetary tightening by the U.S. Federal Reserve. For now, we continue to overweight equities, because of the sustained growth of corporate revenues and earnings, the favourable economic situation and the low risks of recession and inflation.
In this context, on February 6, we bought U.S. and foreign equities to maintain our target weightings in the FDP Tactical Asset Allocation Private Portfolio and in the different balanced funds. As always, we will keep you informed of any strategic adjustments that may be made to the investments you hold with Professionals’ Financial.
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.