Looking back over the past year, markets had a strong start, hit record highs, and were ultimately bookended by a historically weak December, closing the year in the red. Themes such as the central bank interest rate tightening, tariff wars, global growth concerns, and even a twitter account certainly contributed to the volatility and the sell-off we experienced in equities during 2018.
December was one of the most volatile months in recent times, especially on Christmas Eve when the S&P 500 flirted with a bear market (down 20% from its peak) only to significantly reverse course with large gains the next business day.
With markets on as volatile a run as they’ve had over the past few months, it’s important to remind ourselves of the benefits of diversification. At Invisor, our globally diversified asset allocation combined with exposure to the US dollar allowed our portfolios to achieve a better outcome than both the S&P 500 and the TSX at year end. By keeping our portfolios closer to global weights than other Canadian firms do, we are able to mitigate risks that are associated with a home country bias.
Source: Yahoo Finance
*Invisor All Equity Portfolio performance figures are net of fees. Please refer to https://invisor.ca/our-portfolios/ for additional information on
the calculation of portfolio performance.
Bright spots have presented themselves in the form of excellent corporate earnings and a strengthened economy that demonstrated solid GDP growth, as well as unemployment at its lowest level in the past half century. Ultimately, the effects of tariff wars, rising interest rates, lower commodity prices, and growth concerns added more uncertainty to the markets than we’ve seen in years, leaving the S&P 500 with its first annual decline in a decade.
Although there is plenty of concern in the US market, strong fundamentals cannot be ignored and they lay a strong foundation going into 2019. The tailwinds from having a lower corporate tax rate and less regulation still make the US an attractive place to conduct business.
Global developed and emerging markets finished the year off in the red as well. Concerns surrounding global trade and tariffs caused damage. Geopolitical developments in Italy as well as Brexit concerns have impacted European markets. Strength in the US dollar due to rising short-term US yields has also negatively impacted economies who carry debt in this currency, as it makes it more expensive to service the debt load. As a result, we’ve seen countries such as Turkey and Argentina take drastic policy measures to counteract these forces.
Although equity markets have seen sharp pullbacks recently it’s important to remember that the global economy remains in good shape and that market corrections are normal. We expect plenty of volatility in 2019, however the economic fundamentals suggest that the recent pullback will likely not be prolonged.
Key themes to follow in 2019 are the progression of trade talks between China and the US, which are ongoing and set to conclude in March. If a deal is reached, it could be a very positive development for both markets and could easily spillover to the global market.
The activity of central banks will certainly be watched closely. Canadian markets should largely follow global trends, but an election in October may have some impact. While Britain’s departure from the EU is expected to take place, there is still uncertainty as to how it will unfold.
Take comfort in knowing that our portfolios are broadly diversified, and that we follow a disciplined strategy of rebalancing your portfolios when the weights start to shift too far from their targets. It’s important to keep sight of your goals as well as your time horizon. For example, someone who is saving for retirement and plans to retire in 20 years should not be too concerned over day-to-day movements in the stock market; they should be focused on saving at regular intervals and enjoying the compounded growth associated with long-term investing as time passes.
We wish you all the best in 2019!