While Wall Street hit new highs in August, many markets around the world pulled back because of the uncertainty caused by growing trade tensions between the United States and its trading partners, particularly China and Canada. Economic conditions remain favourable, however, and the risk of inflation remains low.
Focus on the past month
Overview of global equity markets
- Driven by technology stocks, U.S. equity markets continued to rise in August, with the S&P 500 Index gaining 3.7%* and the Nasdaq, 6.3%.
- In Canada, the S&P/TSX, fell 0.9%, with the energy and basic materials sectors leading the decline. Canada’s benchmark index is nevertheless up 2.4% year to date.
- Most international stock markets ended the month in negative territory, as reflected by the 1.5% drop in the EAFE Index.
- Emerging markets fell 2.29%, with the Chinese market losing 3.6% of its value.
*All the percentages in this section reflect results in Canadian dollars.
- New twists occurred in the trade war between Washington and Beijing. In August, the United States announced that new tariffs would go into effect in September on an additional $200 billion worth of Chinese imports. China was quick to retaliate with an additional $60 billion of tariffs on various American products. So tensions are still very high between the two superpowers and there is no sign of a quick resolution of this problem, which is making the markets nervous.
- While the United States and Mexico have already concluded a new trade agreement, discussions on the future of NAFTA are still continuing between the Canadian and American governments. At the time of writing, it is difficult to predict how the negotiations will go, since both parties seem reluctant to make concessions on various key issues, including the Canadian supply management system.
- In late August, the Federal Court of Appeal ordered a halt to work on the Trans Mountain pipeline, which the Canadian government bought in May at a cost of $4.5 billion. The Court ruled that the Trudeau administration’s review of the impact that transporting oil to the West Coast would have on marine life was flawed and that it had to engage in consultations with First Nations. This decision will inevitably delay the project by several years and in the meantime will limit the export capacity of Canadian oil companies.
- Government of Canada bonds across maturities generated a return of 0.6% for the month, which represents their cumulative return year to date.
- U.S. job creation was stronger than expected in August, as was wage growth, two factors that are positive for the American economy. Inflation should pick up by year-end 2018, as the Federal Reserve raised its benchmark rate in June and expects to make two more rate hikes, in September and December.
Performance of our funds
Our funds generally performed well in the first half of the year, particularly our FDP Balanced, FDP Balanced Growth and FDP Balanced Income Portfolios as well as our FDP Canadian Equity Portfolio. All were highly ranked by Morningstar in the first half.
Our strategic monitoring
Main risks to consider
The escalation of the trade war between the United States and China is the main risk to global growth. Here are some of the other risk factors that we are closely monitoring.
- The economic problems of Turkey, Argentina and South Africa are slowing the growth of emerging markets and some other emerging economies could in turn be affected.
- Combined with weaker economic growth, an increase in inflation would lead to a period of stagflation, i.e. rising prices in a stagnating economy.
- By raising its benchmark rate too quickly, the U.S. Federal Reserve would likely hinder American and global GDP growth.
- Political instability in Italy and Spain is impeding the economies of these nations and may eventually slow growth in the other countries of the euro zone.
The main fundamental indicators remained rather stable in August. Among those that still augur well for the economy and the stock market are U.S. job creation and manufacturing.
We are maintaining our current strategy of overweighting equities and underweighting bonds, for the following reasons:
- Economic conditions are favourable and the risk of recession is slight.
- The threat of uncontrolled inflation remains low.
- Corporate revenue and earnings growth is sustained.
- Stock valuations are still 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.
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