2019 has produced some remarkable results in terms of financial market performance. Markets were led by the U.S S&P 500 which experienced a calendar year return of 24.45% in Canadian dollars. The TSX in Canada rose 19.2%; developed markets and emerging markets faired similarly, closing the decade off with stellar returns. The Canadian aggregate bond market also had a great year returning just over 6.5%.
In this update, we will discuss important developments, lessons learned throughout the year and ways that we can apply those learnings moving forward.
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close January 2, 2020.
Looking back to the start of 2019 there was an element of fear in the markets as the previous year had ended slightly in the red, caused by a selloff in equities fueled by hawkish central banks, ongoing tariff wars, and global growth concerns. Despite these sources of uncertainty, economic fundamentals remained positive. Investors who sold off would have missed out on the gains as the market recovered and would have had to make the difficult decision regarding when to re-enter the market. There is a famous phrase in investing that stocks climb a wall of worries, and 2019 is confirmation of this saying.
In regards to sources of uncertainty, the fear of central banks continuing to increase interest rates was reversed during the first quarter when US Federal Reserve Chairman Jerome Powell sent dovish signals to the market indicating that interest rate cuts were on the horizon, alleviating significant downward pressure.
Ongoing tariff wars continued to be a source of volatility during the year as protectionist trade policies were on the rise globally throughout the year. Towards year end, concerns quietened after the US and China announced the beginnings of a deal which signaled that both parties are serious about negotiating a long-term agreement.
Another major development throughout the year was a brief inversion of the US yield curve followed by yield curve inversions in other developed economies for the first time since the last financial crisis. A yield curve inversion arises when the yield (total return) on long term debt instruments is lower than that of short-term debt instruments, which means investors are not compensated for making a longer-term investment. An inversion is typically leading indicator of recessions and therefore receives a lot of attention in the financial press. Although it’s widely followed, it’s not always accurate, and as the year progressed and market perception of risk changed, and the yield curve became un-inverted.
A lesson that could be learned from the events of 2019 is that short-term forecasting is extremely difficult. At the start of the year many pundits were calling for a recession to hit in Q2, Q3, or Q4 coupled with a bear market, and had very convincing data to back their point of view. Their theories clearly did not play out during their forecast period. What an investor can learn from this is that macroeconomic variables can change quickly and more importantly that timing markets is very difficult. Lastly, in order to manage risk effectively, it’s important not to be overconfident on a specific view and make impulsive decisions based on the point of view of a pundit that can have long-term implications on your portfolio.
Based on the challenges presented by investing in extremely dynamic markets that are instantly pricing in new information, the basis of our investment philosophy is to control what you can and understand what you can’t. We implement this by choosing an asset allocation (i.e: US stocks, Canadian stocks, Global stocks, Bonds), then ensure your portfolio reflects your risk profile and invest in low cost funds that meet these criteria. These two factors that can be controlled (diversification and low cost) can do wonders for an investor with a long-term horizon and mindset. In our opinion, the last piece of a winning plan is understanding that markets are cyclical and to exhort discipline during downturns.
Geopolitics will continue to be a source of uncertainty; the US and Iran tensions have been elevated following a US airstrike that killed a prominent Iranian general. This will likely drive volatility in the short-term as developments unfold.
The 2020 US election in November could also be another driver of short-term volatility as the market will need to evaluate and assign probabilities to many of the different possible political outcomes and the effect that these outcomes could have on the business community and global economy.
Although market risks are present there are still positives, mainly in the US economy where fundamentals remain healthy and continue to be propped up by the consumer. The labour market in the US is also still very strong and is at or near full employment. Current fundamentals do not necessarily predict an imminent recession in the US. The picture in Canada is not quite as rosy; our consumer statistics and labour market are healthy, but record levels of household debt and rising cases of personal insolvencies are real sources of risk that should not be overlooked.
As is the case with any source of risk, it is important to evaluate it rationally and to not be guided by your emotions. The lesson from 2019 is that, although we can have an idea about what may impact the market, we really have no idea what and when it could unfold. Chasing the news in 2019 would have left you out of the market, missing a significant upside. As always, we believe that you will be best served by staying the course and sticking to your plan.
Happy New Year from the Invisor Team!