Amid week after week of gains at the start of 2019, we have largely recovered from the lows experienced in Q4 2018. March saw the return of some volatility due to mixed economic data as well as an important development in the bond market.*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index as of market close March 29th 2019
The jobs report came in and reported that the US had added 20,000 jobs to the economy during February, which was lower than expected. It’s important to note that the US economy is operating at 3.8% unemployment rate which is a near record low; therefore, it becomes difficult to add more jobs when you’re at a level close to full employment.
The latest Consumer Price Index (CPI) data shows that inflation has remained steady, which will allow the Fed to operate under its more dovish stance as of late and continue to hold off on any rate hikes.
On March 22 the yield on the 10-year US Treasury note hit its lowest level in more than a year, and it marked the first time since 2007 that the yield curve inverted. An inverted yield curve is an interest rate environment in which long-term debt instruments have lower yield than short-term debt instruments. Inverted yield curves are widely considered a leading indicator of a looming recession; that said, they’re not the causes of a recession, there’s simply just a correlation. Historically the lag between the inversion and a recession has been between six months and three years.
The Bank of Canada kept interest rates steady at a bank rate of 2%. Keeping with the sentiment shared by many developed economy central banks, Governor Poloz made dovish comments concerning the path of interest rates in Canada; these comments signal an intention to keep rates low in order to stimulate the economy. The Bank of Canada stated concerns regarding the energy sector and concerns regarding lower consumption in oil-producing provinces. This caused the value of the loonie to drop.
Other headwinds present in Canada include a softening housing market, rising trade tensions with China, and high levels of household debt which is among the highest of developed nations.
The Organization for Economic Co-operation and Development (OECD) cut its forecast for global growth during 2019 citing trade tensions and political uncertainty as major headwinds to growth. However, news on the China-US trade front indicate that significant progress has been made even on complex issues such as intellectual property transfers. The market is viewing this as a signal that a deal is close, which will certainly boost market sentiment once a deal has been signed.
In Europe, evidence of a weakening eurozone is prevalent. They have been hit by a slowdown in China, and as a result their manufacturing data is weakening – particularly in key economies such as Germany and France. Brexit talks are still ongoing, and the outcome is still uncertain at this time. However, a weakening eurozone economy provides an incentive to both parties to ensure that a “no deal” Brexit scenario is avoided.
Amidst mixed data and an inverted yield curve we can expect more volatility. It is important to look at your portfolio and evaluate your asset allocation (ie: percentage of stocks vs. percentage of bonds) to ensure that it matches your true risk profile, is fully diversified, and to rebalance your portfolio if necessary.
An interesting article was published recently that illustrated the importance of reasonable fees and a fully diversified portfolio. The graph below shows the detrimental impact of concentration to a single equity market and high fees. If you allocated 100 percent of your portfolio to a high fee Canadian equity fund, it would be very difficult to achieve your financial goals.
At Invisor, we usually recommend ETFs because of their inherent diversification compared to individual securities, their low fees, and their tendency to outperform most active funds. We try to apply global weights to our portfolios and avoid home country bias.
If you ever have any concerns about your portfolio, sleep on it before making any rash decisions. It’s important to know that investors are not talented when it comes to market timing. We’re always available to assist with any questions you may have. Remember that as a long-term investor you have time to handle any dips and it’s valuable to frame these times as an opportunity to buy the market at a discount.