Stock markets continue to climb
Led by Wall Street, the rise in global equity markets that began in early January 2019 continued in April. World economic growth is still in positive territory and the risk of recession is limited for the next few months.
Focus on the past month
Overview of global equity markets1
- The Canadian stock market performed well in April, the S&P/TSX rising 3.2% during this period.
- In the United States, the Nasdaq gained 5.1% and the S&P 500, 4.4%.
- International stock markets were also up, with the EAFE Index climbing 3.2%.
- Elsewhere in the world, the Chinese stock market advanced 2.6% while emerging markets added 2.5%.
1 All the percentages in this section are in Canadian dollars.
- At its April meeting, the Bank of Canada left its policy rate unchanged while suggesting that there would be no new rate increases in the near future
- The U.S. Federal Reserve (Fed) is also putting rate hikes on hold for now and is thinking about the future of its balance sheet reduction program. There are diverging opinions in this regard. The market would like to see a rate cut which would stimulate inflation, while the Fed is in favour of keeping rates unchanged, believing that inflationary pressures would gradually return.
- The yield curve remained inverted in April in Canada and the United States, with 10-year yields still below 3-month yields. This situation usually portends a recession in the following 12 months. However, the yield curve returned to normal in early May.
- In Canada, 7,200 jobs were lost in March, when forecasts called for the creation of 6,000 new jobs. However, this comes on the heels of 55,900 new jobs created in February, when expectations were for 1,200. Canadian GDP contracted by 0.1% in February, bringing its one-year growth to 1.1%. The Canadian dollar was trading at US$0.7468 at the end of March; year to date in 2019, the loonie is up 1.9%.
- The situation seems to be stabilizing in China, retail sales having risen by 8.7% versus expectations of 8.4%. In addition, China’s Purchasing Managers’ Index was at a satisfactory level for the second consecutive month.
- Germany’s data were weak, with a significant drop in foreign orders.
- With regard to Brexit, the deadline for an agreement between the U.K. and the European Union was postponed to October 31, 2019. The uncertainty surrounding this key issue is weighing on the euro zone economy.
- Government of Canada bonds posted a return of -0.3% for the period.2
2 Source : Canaccord Genuity
Performance of our funds at April 30, 2019
Year to date, the relative performance of our funds has been attractive and they are favourably ranked in the Morningstar ratings.
Our strategic monitoring
Here are some risks that could generate more volatility on the markets.
- The trade conflict between Washington and Beijing is still not settled and it is possible that the two superpowers will not come to an agreement, which would result in a new increase in U.S. tariffs on Chinese imports.
- The about-face by the Fed, which is now in favour of a pause in rate hikes, could be a mistake. Excessively low rates would be problematic in a context of a re-accelerating economy and a significant rise in inflation.
- The Fed could lose its credibility if it seems to be giving in to the demands of the U.S. president, which would destabilize the markets.
- A Brexit without an agreement between the U.K. and the European Union would likely prolong the economic slowdown in Europe.
Corporate bond risk
Since the stock markets are doing well, fewer investors are expecting a correction and investor confidence is higher, possibly suggesting complacency. Such a sentiment is often associated with a market top.
Risk premium on Italian and Spanish bonds
The yields on the bonds of these two countries fell more sharply than the yields on German bonds. The risk has therefore decreased and seems to be contained to Europe
Our strategies at April 30, 2019
The equity and bond weightings in the FDP Tactical Asset Allocation Portfolio are now in line with their targets. Canadian and U.S. equities are neutral weight, while EAFE markets are underweight and emerging markets are slightly overweight.
We remain bullish on the stock markets, even though it is late in the market cycle. First quarter earnings and the outcome of the trade talks between the U.S. and China are two factors that will guide our forthcoming tactical asset allocation decisions.
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.