In June, global stock markets were marked by instability due to fears related to the trade war that the United States has started with many of its trading partners. In this tense environment, North American equity markets nevertheless continued to rise, ending the month in positive territory.
Focus on the past month
Overview of global equity markets
- In the United States, the S&P 500 Index gained 0.5% in June, while the Nasdaq was up 0.9%, due among other things to the strong performance of the consumer sectors.
- Although the Canadian stock market did not perform as well as last month, the S&P/TSX Index still rose by 1.3% thanks to strength in the energy sector.
- In Europe, the stock markets of Germany and France struggled, while those of Spain and Italy performed better. Overall, European stocks fell 0.65%.
- Weighed down by uncertainty, emerging markets ended the period off 4.5%
- After reaching $72.82 on May 22, the price of a barrel of oil fell, ending the month down 2.3%. OPEC’s intention to increase global production shortly explains this decline. The price of oil has nevertheless risen by 10.8% year to date.
- The price of a barrel of oil rose 10.7% in June and is up 22.6% year to date. The reduction in U.S. inventories and the problems in Venezuela, Libya and Iran are putting upward pressure on prices. President Trump’s request that Saudi Arabia increase its production did not suffice to stabilize oil prices.
- During the month, the United States followed through on its protectionist intentions by putting off until November the continuation of the NAFTA negotiations and by imposing major tariffs on Canada and Europe, which retaliated in kind. The Trump administration also announced new tariffs on imports from China, which quickly responded with tariffs of its own in early July. Trade tensions between the U.S. and the rest of the world have thus reached unprecedented levels and this situation is contributing to heightened market nervousness.
- The strength of the U.S. economy and the spectre of a trade war have prompted investors to turn to U.S. Treasuries. Credit spreads have therefore widened and high-yield bonds have benefited from the increase in the price of oil.
- U.S. job creation was stronger than expected and wage growth came in slightly below expectations, which augurs well for U.S. economic growth. In Canada, despite job growth, the unemployment rate was up slightly due to an increase in the labour force.
- In terms of monetary policy, the U.S. Federal Reserve raised its benchmark rate in June and expects to do so again in September and December, while the Bank of Canada hiked its rate on July 13, which suggests slightly higher inflation for the rest of 2018. The European Central Bank plans to stop its asset buying program in December 2018 and expects to make its first rate hike in a long time in late 2019.
Performance of our funds
Our funds generally performed well in the first half of 2018. Note, for example, the excellent positioning of our FDP Balanced Portfolio and our FDP Canadian Equity Portfolio relative to their peers. Both are ranked in the first decile by Morningstar for the first six months of the year.
Our strategic monitoring
Main risks to consider
Here are some risks that we will be watching closely in July.
- The probable intensification of the trade war between the United States and China would likely have negative repercussions on corporate earnings and stock market growth.
- A too-rapid tightening of U.S. monetary policy would stifle the economy.
- The political problems in Italy and Spain could impact the other countries on the continent and weaken the entire euro zone.
- The tensions shaking the Middle East after the U.S. withdrawal from the Iranian nuclear deal could create even more market uncertainty.
The main fundamental indicators were little changed in June. Among those that are still positive for the economy and the stock market are the global purchasing managers manufacturing index, new orders and U.S. job creation.
We remain overweight in equities, although we slightly reduced our equity position and raised our cash level. We favour stocks for the following reasons:
- The risk of recession is low.
- The threat of uncontrolled inflation remains low.
- Corporate revenue and earnings growth remains sustained.
- Stock valuations are reasonable.
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.