Global equities closed the month lower due to continued trade tensions and concerns of a global slowdown in growth. Although volatility has picked up, there hasn’t been any significant deterioration of fundamental conditions. Volatility in a market cycle is normal and expected; while we ideally don’t want too much volatility as markets advance, our minds can be eased knowing that markets have climbed over different walls of worry at different periods in time.
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index as of end of day May 31 2019
Early this month, President Trump put out a couple tweets escalating the ongoing trade spat between the US and China by announcing further increases on tariffs of imported Chinese goods. Global equity markets slid following the announcement and increased volatility was experienced throughout the month. President Trump further lowered the odds of a short-term resolution by signing a ban of Chinese telecommunications giants Huawei and ZTE.
Last month, markets believed these two economies were very close to reaching a deal, and today the picture is more uncertain; however both sides have strong incentives to resolve their differences, so we’re under the impression that these measures are being used as a negotiating tactic. Although we’re seeing an upturn in volatility, macroeconomic data is still supportive: unemployment is at record lows, inflation is low, interest rates are low, and quarterly earnings have been positive.
Data for the Canadian economy is mixed. The April jobs report showed that the labour market is healthy and that it posted a larger-than-expected one-month gain. Inflation, however, is on the rise partly due to an increase in gasoline prices as six provinces have recently introduced carbon taxes. Household debt is also very high among developed nations. In trade news, China announced an ominous threat aimed at Canada for its support of the US involving the arrest of a Huawei executive.
Although Canada has had a great start to the year in equity markets, it’s important to diversify outside of the country as the Canadian market is largely composed of financials and energy stocks. To avoid concentration risk, we construct portfolios that are globally diversified.
Trade policy moved markets into the red for the month across the globe, and major indexes retreated from recent records as the tensions continued. China announced retaliatory measures by increasing tariffs on US imports and cancelling purchases of US soy. The tit-for-tat retaliations led to a spike in the CBOE Volatility Index (VIX), jumping 30% following the announcements.
Most economists would agree that the best trade policy is free trade – meaning trade with no tariffs – as tariffs can be seen as a tax that’s paid by the consumer rather than the exporting country. Free markets and global trade have proven to be the best way to promote global prosperity. A resolution will brighten the outlook, but the longer these issues drag on, the more damage will be done and ripple effects will be felt across the globe.
The month ended with new tariff threats from President Trump aimed towards Mexico, which will take place mid-June if Mexico can’t improve the immigration situation at the US southern border. This announcement led to North American markets falling further into the red for the month as the announcement has the potential to derail the progress on the USMCA.
With all the noise present in markets, you may hear the old investing adage of “sell in May and go away” floating around. We don’t think that’s a sensible basis for any long-term investment strategy; instead, we suggest following a strategy that includes making timely adjustments (for example, having an allocation plan in place to invest cash flows during major market events). Amidst the mixed data and all the volatility that can be created from a single twitter account, it’s natural to worry a little bit. Take comfort knowing that markets have overcome worries before (see chart below) and economic fundamentals generally drive market performance in the long run.
We expect trade policy to continue to create volatility in markets in the short-term. As always, it’s useful to keep the mindset of a long-term investor and not get distracted by all the different day-to-day headlines. If there is anything you would like to chat about, feel free to schedule a call. Otherwise enjoy the start of the summer and let’s go Raptors!