Stock markets fall around the world
Global equity markets had their worst month of the year in May, mainly because of the escalating trade tensions caused by the United States. From the economic standpoint, some countries are faring better than others, but the trend seems to be pointing to a global slowdown.
Overview of global equity markets1
- In the United States, the Nasdaq fell 7% in May, while the S&P 500 Index lost 5.6% of its value.
- The Canadian stock market did a little better; even so, the S&P/TSX declined 3.1% during the period.
- International stock markets followed the negative trend, with the EAFE Index ending the month down 3.9%.
- Elsewhere in the world, emerging markets fell 6.5% while the Chinese stock market plummeted 12.3%.
1 All the percentages in this section are in Canadian dollars.
- In May, the U.S. administration hardened its trade stance. Just as observers were expecting the United States and China to reach an agreement, Washington announced new tariffs of 10% to 25% on another $200 billion of Chinese imports. Then, much to everyone’s surprise, president Trump threatened to impose tariffs on Mexican products to compel the country’s government to curb illegal immigration at the U.S. border. Even so, the Americans have postponed the imposition of new tariffs on European vehicles and lifted the tariffs on aluminum and steel from Canada and Mexico.
- The 10-year yield curve inverted in relation to the three-month yield, in both Canada and the United States.
- As a result of comments by the U.S. Federal Reserve (Fed), the markets expect a decrease in the key rate. That being said, the U.S. monetary authorities are taking a cautious and patient approach for the time being.
- In the U.K., prime minister Theresa May resigned because the British Parliament rejected the various agreements that her government negotiated with the European Union. The outcome of this chapter in Europe’s history is difficult to predict and is causing a great deal of concern.
- Government of Canada bonds returned 1.4 % for the period.2
2 Source : Canaccord Genuity
Performance of our funds
Our FDP fixed income portfolios did especially well in May. As for the FDP Canadian Equity Portfolio, it still ranked among the best funds of its kind in Canada.3 Our FDP US Equity and Emerging Markets Equity Portfolios ranked in the third quartile, even though they are aligned with the benchmark indexes specified in their investment strategies.
3 Source : Morningstar Inc.
Our strategic watch
Several risks are likely to have an impact on the economy and the markets:
- The trade war between the world’s two superpowers is intensifying, and the new tariffs on Chinese goods entering the United States are likely to hit U.S. consumers hard.
- A military conflict between the United States and Iran could occur in the aftermath of the economic sanctions imposed on Tehran by Washington.
- The possibility of a Brexit with no agreement between the U.K. and the European Union is very real; such an outcome would prolong the economic slowdown in Europe.
- The about-face by the Fed, which is now considering cuts to its key rate, could be a mistake. Excessively low rates would be problematic in the context of a re-accelerating economy and a significant rise in inflation.
Expansion of the U.S. money supply
Over the past six months, the growth of the money supply in the United States has been practically nil.
U.S. key rate
Three cuts in the key rate are expected in the United States over the next 12 months, suggesting that the market considers the current rate too high, given the economic uncertainty.
U.S. stock market valuations
Valuations improved, with the price-to-earnings ratio declining slightly from a multiple of 16.7 to 16.
We reduced the equity weighting in the FDP Tactical Asset Allocation Portfolio by 10% in May, and also changed the weighting in our balanced portfolios. Currently, fixed income is overweight, the cash level is up slightly and the equity weighting is in line with the targets, all of which corresponds to a defensive positioning in a context in which geopolitical risks are still present.
Even though the current cycle is advanced and the trade war between China and the United States is heating up, we remain optimistic about the outlook for the stock market but will proceed cautiously.
François Landry, CFA
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.