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Another month of rising markets

January’s positive momentum continued into February, as global stock markets posted a strong performance for a second consecutive month. Progress in the trade talks between Washington and Beijing had a positive impact on the markets, as did the Fed’s confirmation that it would likely pause its interest rate normalization policy.

Focus on the past month

Overview of global equity markets1
  • The Canadian stock market continued to climb in February, with the S&P/TSX Index rising 3.1%.
  • In the United States, the S&P 500 and the Nasdaq also performed well, gaining 3.3% and 3.7%, respectively.
  • International stock markets posted good results as well, with the EAFE Index up 2.7%.
  • The Chinese stock market rose 2.5%, while emerging markets ended the period with a slight gain of 0.3%.

1All the percentages in this section are expressed in Canadian dollars.

Key events

 

  • The Fed chairman suggested that he was now in favour of a pause in the rate normalization process. The governor of Bank of Canada adopted a similar position, believing that inflation in Canada was still below its target.
  • According to economic data published in February, the partial shutdown of the U.S. federal government had tangible repercussions and the extent of the ensuing economic slowdown will be known shortly.
  • To pay for the wall that he promised to build on the Mexican border, the U.S. president declared a national emergency in order to take funds from other government programs, a move criticized by the opposition Democrats and by many House and Senate Republicans.
  • Talks between the U.S. and China are continuing and the progress achieved led to an extension of the March 1 deadline for new tariffs. The leaders of the two superpowers could meet in late March in order to finalize an agreement.
  • In Canada, 66,800 new jobs were created in January, versus expectations of 5,000. GDP fell, resulting in a drop in the Canadian dollar to US$0.7594 in late February. Year to date in 2019, the loonie has risen by 3.6% against the greenback.
  • The U.K. and the European Union have still not reached an agreement on how to resolve the Brexit impasse, as the March 29 deadline approaches.
  • Government of Canada bonds across maturities posted a return of -0.1% for the period2.
Performance of our funds at February 28, 2019

Our fund rankings were generally good in February. The favourable relative performance of Canadian and global equities contributed to the above-median position of our three balanced funds. In addition, quality stocks are finally enjoying a resurgence which has benefited us. Note that in Canada, cannabis stocks had a very strong start to the year, which improved the performance of the S&P/TSX. Considering its investment philosophy, its values and the values expressed by its clients, Professionals’ Financial excludes canabis stock from its portfolios. Our Canadian equity managers nevertheless obtained a very good ranking relative to their peers.

2Source: Canaccord Genuity

 

Our strategic monitoring

Main risks

Here are some risks which could hinder economic and market growth.

  • The possibility that a trade deal between the United States and China will not be reached.
  • Doubts about Mexico and Canada signing the new trade agreement between the United States, Mexico and Canada (USMCA).
  • Concerns about the political and economic situation in Italy and fears of contagion to the entire euro zone.
  • Problems related to Brexit and the uncertainty that this situation is causing in the U.K. and in Europe.
Fundamental indicators

The following indicators changed direction in February.

U.S. benchmark rate 

The Fed decided to wait before raising its benchmark rate and is focusing on reducing its balance sheet, while keeping it at a higher-than-expected level.

U.S. stock market valuation

Following the rise in the price/earnings ratio since December 24, 2018, the U.S. market is now fairly valued. The probable resolution of the U.S.-China trade conflict should boost the economy in the second half and accelerate corporate earnings growth.

Our strategies at February 28, 2019

The equity weighting of the FDP Tactical Asset Allocation Private Portfolio has reached 62%, i.e. 7% above the 55% target. U.S. and emerging market equities are overweight, while Canadian stocks are neutral weight and EAFE markets are underweight, as are bonds.

Pending the results of the talks between Washington and Beijing, we remain positive on the direction of the stock markets, although we realize it is late in the market cycle. We are therefore maintaining our strategy for a number of reasons, including:

  • Economic conditions are favourable and the risk of recession is low.
  • The threat of uncontrolled inflation remains minimal and is limited by the sharp decline in oil prices.

François Landry, CFA

Senior Vice-President and Chief Investment Officer

Sources: Bloomberg

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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