Global equity markets made an impressive comeback in January after a poor end to 2018. Equities were boosted by signals from the US Federal Reserve that they will be more patient with the path of future rate hikes amid mixed global economic data. Emerging economies continued their rally fueled by a less hawkish sentiment across global central banks, the S&P/TSX hit its highest level since October, and the Canadian dollar strengthened relative to its US counterpart. We also saw signs of progress on the US-China trade negotiations.
Results as of market close January 31, 2019
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index
The US government entered the year partially closed. This closure was due to a border wall funding impasse and the partial shutdown lasted 35 days – the longest in US history. The shutdown came to end without getting the $5.7 billion that Mr. Trump had demanded for the wall. The Congressional Budget office expects that the majority of lost GDP over the shutdown can be recovered. Although the shutdown has ended there is little agreement on the issue in Washington. This could weigh on business confidence and financial market sentiment.
On January 4th markets began their rally when Fed Chairman Jerome Powell provided guidance to the markets by stating that they’ll be patient with future interest rate hikes, decisions will be dependent on the economy’s performance, and that there’s currently no preset path for future rate hikes. Unsurprisingly, the Fed kept rates steady at their meeting on January 10th.
The December jobs report came in and showed that the U.S economy added 312,000 non-farm jobs that month. The January report may be hindered by the shutdown. Wage growth strengthened year-on-year by 3.3%. Industrial production is at an all-time high and there are currently more job openings than there are job seekers in the US.
Concerns over a slowdown in China are still present, stemming from a domestic slowdown and trade tensions. While China is still growing, it’s currently growing at its slowest pace in the past two decades. China’s central bank and government are taking policy measures to help accelerate growth. If conditions were to deteriorate in China, the effects would ripple across the global economy and affect corporate profits.
Europe has also been hurt by the ongoing trade spat in the form of a fall in demand from China. The yellow vest protests have caused significant disruption in France. Italian GDP has contracted by 0.2% over the previous quarter, and since this is the second quarter of negative growth, it puts Italy in a recession. On a more positive note, unemployment is at its lowest level since October 2008. Europe could greatly benefit if the news flow surrounding US-China trade and EU-US trade continues to progress.
In the UK, Prime Minister Theresa May put forward a vote on a Brexit deal negotiated with the EU which failed to pass by a large margin; she will put forward a revised deal to a vote in the House of Commons on February 13th. Significant uncertainty still exists surrounding Brexit. Market participants are hoping that a ‘no deal’ scenario can be avoided. Despite the Brexit headlines the unemployment rate in the UK is decreasing and wages are growing.
Early in the month the US and China made some progress on narrowing their differences on trade issues at their meeting in Beijing. These negotiations took place as part of the trade truce declared by Chinese president Xi and President Trump back in December when the two leaders met in Argentina. US Treasury Secretary Steve Mnuchin even proposed lifting some or all tariffs on Chinese imports to advance the trade talks. These developments have contributed to the rebound we saw throughout the month, and we hope to see a resolution shortly.
The fundamental picture still supports growth in the global economy. If demand continues to improve it will help fuel the growth of emerging market economies. We will continue to monitor trade developments between the two largest economies in the world. The truce will come to an expiration on March 1st; If an agreement can be reached, this would remove a great deal of uncertainty from global markets. We expect volatility to persist, therefore it is important to be invested in a portfolio that reflects your investment objectives and time horizon.
The difference in performance between December and January provide an example of why it is important to stay invested. There is a compound penalty for trying to time the market and getting it wrong – that’s why we need to focus on our goals. Think of investing as a marathon; a long-term view is required to do well.