After advancing strongly in January, U.S. and global stock markets fell in early February, due primarily to renewed investor concerns about a return of inflationary pressures.
The markets have since recovered some of their losses, and although the economic outlook remains positive and corporate earnings are coming through, volatility will be back in 2018.
Focus on the past month
Overview of global equity markets
- In the U.S., the S&P 500 Index lost more than 10% of its value in the first two weeks of February and ended the month down 3.9%.
- The Canadian market’s benchmark index, the S&P/TSX, lost 3.2%, with energy issues continuing to struggle.
- Stock markets in Europe, Oceania and the Middle East retreated 4.7%, while emerging markets declined 4.0%.
- U.S. job creation was very strong, and the rise in wages was smaller than expected. The financial markets reacted positively to this data, which show that economic growth is continuing and that inflation is not as strong as anticipated. In these conditions, growth stocks and cyclical issues should be favoured.
- Washington announced that tariffs would be applied in the very short term on imports of steel (25%) and aluminum (10%). However, the U.S. authorities are exempting Canada and Mexico from these protectionist measures and are leaving the door open to possible agreements with other steel and aluminum producing countries, which is mitigating fears of a trade war which would slow global economic growth.
- To everyone’s surprise, North Korea opened the door to eventual talks on denuclearization, a step which for now has reduced the level of global political risk.
- The current environment suggests a rise in inflation in 2018, which will likely prompt the U.S. Federal Reserve to raise its benchmark rate three or four times before year end.
Performance of our funds
In this environment, our funds are well positioned. Our management style, which focuses on quality of investments, has enabled us to generate strong performance, despite market turbulence.
Our strategic monitoring
Main risks to consider
Certain geopolitical risks could have adverse consequences in the short term.
- If the trade dispute between the U.S. and China heats up, this could have a negative impact on the economies of these two giants and on global growth.
- The end of the North American Free Trade Agreement would result in a decrease in Canada’s gross domestic product and job losses in the country, as well as a depreciation of the loonie.
- Tensions in the Middle East (Syria, Iraq, Egypt, Libya, Iran, Yemen and other countries) are worrisome and could impact oil prices and, by extension, the stock markets.
These indicators are economic statistics or market data that help managers formulate a forward-looking investment strategy. Here is how some of these indicators moved in February and the possible repercussions of these moves.
- The growth of the U.S. money supply was curbed, which could suggest slower economic growth in the second half of 2018.
- The level of investor complacency fell, but investors remain bullish on the stock market.
- The corporate bond yield spread widened, indicating that investors have reassessed somewhat the uncertainty surrounding riskier assets.
The pace of monetary tightening by the U.S. Federal Reserve in 2018 will influence the positioning of our Private Portfolio Management and Private Securities Management portfolios.
- At present, we are still overweight equities, despite the fact that the price/earnings ratio is slightly above the historical average.
- The favourable economic situation, the low probability of recession, the synchronization of global economies and the sustained growth of corporate earnings are all factors that make this asset class more attractive.
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.