In February, we saw a reintroduction of volatility in the market. The steep drops early in the month were partially clawed back as cooler heads prevailed, but that left many investors with chilly reminders of the recession of 2008. Despite the perceived similarities, we believe this situation is far from the economic fall 10 years ago, as stated in our letter to investors here. Having said that, we see higher volatility persisting in the near future. In this economic update, we’ll talk about why volatility is here to stay and how to manage it. First, let’s start with a note on the Canadian economy.
Global equity markets have had a solid start to the year, particularly outside of Canada. Even with the stronger Canadian dollar offsetting some gains, most developed markets still performed very well. Emerging markets have also kept a strong pace as the China’s response to tighter credit quieted doubters as the market has chugged along.
Looking back over the past year, global equites ended up performing stronger than most analysts predicted, consumer confidence improved, volatility was down, and central banks kept inflation in check. All in all, besides weakness in the US dollar and underperformance in Canada, portfolios had a very strong year.
Following the election of Donald Trump in November 2016, the outlook for the year ahead held the promise of political volatility and, as a result, economic volatility. It’s fair to say that politically, we’ve been let down, but the market has actually had one of its least volatile years on record, and global markets are all in the black. In this update, we’ll look at the key drivers to this low volatility and discuss whether the trend will persist going forward.
Global markets surged in October setting a series of records throughout the month. For many investors, the question now is whether the current valuations are stretched or if there is still room to go. While there is no shortage of black swan events that could derail the current rally (i.e. North Korea and Washington), market fundamentals support the current valuations.
North American equity markets showed resilience to significant geo-political tensions and natural disasters in September. On one hand, the North Korean threat to the world escalated significantly with the latest nuclear test, while on the other hand hurricanes Harvey and Irma caused devastation in various parts of the US and the Caribbean.
In Canadian dollar terms, global developed markets evened out in August. While the month was relatively tumultuous from a geopolitical standpoint, economic news has remained much the same. The Canadian dollar has kept its relative strength versus the US dollar, driven partially on expectations of rising Canadian yields but, more importantly, on weaker demand for USD.
With seemingly endless surprises coming out of Washington this past month, the lack of confidence in US politics has put pressure on the US dollar. In Canadian dollar terms, that pressure has manifested in weak returns across global developed markets.
In their local currencies, global equity markets were relatively flat in June (see Canada below). However, a devaluing US dollar and a stronger Canadian dollar were reflected in negative returns for Canadian portfolios. In this market update, we'll look at the cause of the devaluing US dollar, and what it could mean going forward.
Markets have continued to tread along, not disrupting the pace set over the past few months with the UK, Japan, and emerging markets showing the strongest returns. While fundamental data continues to support the rise, the real surprise is that this positive move has done so with little volatility.