As uncertainty revs up, global GDP is on track to rise 3% in 2019, the slowest pace in a decade.¹ Global trade volumes fell in 2019 for the first time since the Great Recession, reflecting roller coaster U.S.-China trade negotiations, a lack of progress on Brexit, and political unrest in Hong Kong and some Latin American countries. Central bankers have responded with stimulus to keep the decade-long expansion going. While low interest rates and accommodative financial conditions will likely prolong the expansion, much will depend on geopolitical influences. We are monitoring these developments and have concluded that our Stagnation outlook for the U.S. economy over our forecast time horizon of twelve months still stands, with a recession likely in 2021.

China’s exports to economies involved in the regional supply chain have continued to grow as manufacturers increased shipments to the rest of Asia.  The December U.S. announcement of the Phase One trade deal has committed China to terms on increased intellectual property protection, limits on forced technology transfer, exchange rate transparency, further opening of the financial sector, and increased purchases of U.S. goods and services.²

European growth prospects have improved after several months of stagnating, with survey data improving across both the business and consumer space. In his last meeting as the ECB president, Mario Draghi held rates unchanged. In Germany, disruptive regulations, the global trade conflict, and weakness in global car sales have been blamed for the slump in German car production.³ Data continues to show that German carmakers continue to do well globally. The U.K. Conservative election victory suggests that the withdrawal agreement legislation will likely be passed, allowing for a stable Brexit transition to begin at the end of January.

Slowdowns in China, Germany, and South Korea as well as protests in Latin America, the Middle East, and Hong Kong may be helping U.S. economy to avoid a downturn by driving investment toward America’s relatively safe harbors. The FOMC left rates unchanged at the December meeting.⁴ The resilience of the U.S. consumer has helped offset challenges in the factory space, thanks to a solid job market that has bolstered confidence and spending. In early December, the Phase One trade deal between China and the U.S. and the revised NAFTA were announced.

Canada’s third quarter gross domestic product data delivered an expected slowdown, as a drop in exports and drawdown in business inventories masked a rebound in domestic demand.⁵ Strong economic growth earlier in the year has kept the Canadian dollar in its number one spot among major currencies in 2019, supported by some of the highest yields in the G-7 and by the BOC’s reluctance to ease policy like the Federal Reserve and European Central Bank.⁶

In November, the S&P 500 was up 3.6%, its biggest monthly gain since June, while the S&P SmallCap 600 and the S&P MidCap 400 gained 3.1% and 3.0%, respectively. Canadian equities posted gains in November, with the S&P/TSX Composite up 3.6%. The S&P Europe 350 gained 2.8%, keeping it on track for its best year since 2009. The S&P United Kingdom joined the positive trend, gaining 1.8%, despite uncertainty caused by the pending general election. Trade optimism also helped lift Asian equities in November. U.S. fixed income performance was mixed, with leveraged loans as the top performer while Treasuries lagged. With the People’s Bank of China cutting rates in November, Pan-Asian yields ticked down and bond prices rose.

In December, we maintained the November allocation between Equities and Fixed Income across all models. Allocation to equities remains at 17% in Tactical Conservative, 22% in Tactical Moderate Growth, 36% in Tactical Growth, and 44% in Tactical Aggressive Growth. Within the Fixed Income allocation, we maintained the weight of the 7-10 year maturity in order to protect the portfolio from a rebound in long rates, as treasury yields have been declining and the yield curve is close to inverted. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.

We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame , President and CIO

 

¹ International Monetary Fund. World Economic Outlook. October 2019.

² ForeignPolicy.com. Why China Isn’t Celebrating the Phase One Trade Deal. December 18, 2019.

³ Trading Economics. Germany Car Production. November 2019.

⁴ Trading Economics. U.S. Fed Funds Rate. December 11, 2019.

⁵ Trading Economics. Canada GDP Growth. November 29, 2019.

⁶ Trading Economics. Canadian Dollar. November 30, 2019.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. November 30, 2019. Index performance is based on total returns and expressed in the local currency of the index.

 

Having already slowed from 4% to 3%, world GDP growth is set to take another leg down as growth in advanced economies slows to its weakest pace since 2012.¹

Under the cloud of protectionism, global trade flows, which have been decelerating due to tariffs, are now outright contracting on a year-on-year basis. As a result, most of the weakness in the world economy this year has been in industry, while the services sector has held up quite well.² We are monitoring these developments and have concluded that our Stagnation outlook for the U.S. economy over our forecast time horizon of twelve months still stands, with a recession likely in the last quarter of 2020 or early 2021.

The outlook for some emerging markets has been improving, but as emerging economies have benefited from globalization, they are more likely to lose out from de-globalization. China’s economy has remained resilient in recent months, but GDP growth is set to be the weakest in decades. With the property construction boom near the end of its cycle, headwinds from higher food inflation, and cooling global demand, a slowdown will be unavoidable.

In Europe, the outlook for exports is poor because the euro-zone’s key trading partners are losing momentum. To offset the slowing growth in Europe’s economic heartlands and ongoing Brexit uncertainty, the European Central Bank has extended its deposit rate further into negative territory and announced another round of asset purchases.³ It is encouraging that the share of non-performing loans continues to drop in places like Spain and Italy, reflecting a more resilient banking sector.⁴

In the U.S., consumer spending increased at a nearly 4% annualized rate for the first nine months of 2019 with rate-sensitive durable goods purchases rising at a double-digit pace. U.S. customs receipts hit a record $7.2 billion in August, good news for the Treasury but bad news for domestic firms who are paying those tariffs.⁵ The average tariff rate on U.S goods imports has doubled over the last year and a half.

Canadian GDP was flat in July, ending a run of upside surprises that amounted to the best monthly growth streak in two years. Maintenance shutdowns in the oil and gas sector and a pullback in drilling activity weighed on growth in July.⁶

Despite slowing economic growth, ongoing trade tensions, and a presidential impeachment inquiry, U.S. equities recovered in September. Large-caps underperformed mid and small-caps, with the S&P 500 up 1.9%, while the S&P MidCap 400 and S&P SmallCap 600 gained 3.1% and 3.3%, respectively. For the first three quarters of 2019, the S&P 500 outperformed, gaining 20.6%, while the S&P MidCap 400 and S&P SmallCap 600 gained 17.9% and 13.5%, respectively. Canadian equities gained during the month, third quarter, and YTD, with the S&P/TSX Composite up 1.7%, 2.5%, and 19.1% for those respective periods. The S&P Europe 350 shrugged off the gloom to finish the month, quarter, and YTD with gains of 3.8%, 2.6%, and 20.0%, respectively. A declining pound helped support the S&P United Kingdom which gained 0.8% for the quarter and 3.0% in September. Fixed income markets posted negative results in September.

The U.S. dollar maintained its positive momentum through September even after the Federal Reserve cut rates for a second time this year. In contrast, the euro slumped to its weakest level since 2017 as economic data in the Eurozone continued to deteriorate while U.S. economic results surprised to the upside. The loonie remained strong against the U.S. dollar in spite of the dollar strength and declining crude prices.

In October, we maintained the September allocation between Equities and Fixed Income across all models. Allocation to equities remains at 17% in Tactical Conservative, 22% in Tactical Moderate Growth, 36% in Tactical Growth, and 44% in Tactical Aggressive Growth. Within the Fixed Income allocation, we shifted a part of our 20+ year treasury exposure in each of our portfolio models to the 7-10 year in order to protect the portfolio from a rebound in long rates, as treasury yields have been declining and the yield curve is now inverted. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.

We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

¹ Capital Economics. Global Economic Outlook. Q4 2019.

² Capital Economics. Global Economic Outlook. Q4 2019.

³ S&P Dow Jones Indices. Index Dashboard: Europe. September 30, 2019.

⁴ National Bank of Canada. Monthly Economic Monitor. Economics and Strategy. October 2019.

⁵ RBC Economics. Financial Markets Monthly. October 4, 2019.

⁶ RBC Economics. Financial Markets Monthly. October 4, 2019.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. September 30, 2019. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The pace of global growth continues to slow this year as policy uncertainty takes its toll on the world’s economy. The 1% decline in global growth over the past year in conjunction with the trade war and a number of geopolitical conflicts raises the risk of recession as the rules-based approach to governing international trade is breaking down.¹ We are monitoring these developments and have concluded that our Stagnation outlook for the U.S. economy over our forecast time horizon of twelve months still stands, with a recession likely in the last quarter of 2020.

In a year in which politics is generating a large negative sentiment shock, macroeconomic policy has thus far cushioned the blow. The Fed’s early-year pivot away from normalization signals a more growth-supportive policy. China’s moves on multiple fronts are validating its commitment to do “whatever it takes” to prevent growth from slipping below 6%.² Reinforcing the two largest economies’ efforts, 17 of the 30 central banks have lowered policy rates in the last three months.³

Developing market unemployment rates stand at a 40-year low although the major growth disappointments this year have come from Western Europe. Germany’s GDP shrank 0.3% quarter over quarter in the second quarter. Excluding Germany’s contraction, Euro area GDP rose 1.2% quarter over quarter. At the country level, growth in Italy was also weak at 0.1% quarter over quarter, and other countries were sluggish including France at 1%. These were offset by some firmer performances including Portugal at 2%, Spain at 1.9%, and the Netherlands at 2.1%.⁴ Boris Johnson began his term as U.K. Prime Minister with demands for a renegotiation of the E.U. withdrawal agreement, issuing a threat to leave without one otherwise. The pound sterling declined to near its lowest in two years.

While the outlook for global economic growth may be more qualified, recent U.S. data has exceeded expectations. Consumers continue to power the U.S. economy. Tariffs have done little to reduce the U.S. trade deficit with China and the country’s overall deficit continues to widen, particularly with Mexico, the EU, and some of China’s neighbours. Exports have slowed over the last year while imports have continued to increase. U.S. industry is participating in the global slowdown as factory output fell again in July after declining in the first half of 2019.⁵ Despite the slowing, job gains are still solid. U.S. business investment declined in Q2 for the first time since 2016.⁶

The FOMC statement on July 31st explained that Fed motivation to cut was driven by negative global factors. The cut of 0.25 percentage points was America’s first in over a decade. Despite President Trump’s complaints that the strong dollar is holding back the economy, the dollar isn’t that far above its long-run average. The 3% appreciation over the past 12 months is minor in comparison to the 16% surge in late 2014 and early 2015.⁷ The strengthening against the Chinese renminbi has actually been a positive by limiting the upward pressure on prices from tariffs on Chinese goods.

The odds of the Bank of Canada following the U.S. Fed and other global peers with lower interest rates have increased as the U.S.-led trade war with China has intensified – with risks if anything tilted to an earlier move than the 25 basis point cut that was expected in early 2020.

After a record June, accompanied by continued earnings beats and a month-end interest rate cut from the Federal Reserve, U.S. equities continued to post gains in July. The S&P 500 was up 1.4% while the S&P MidCap 400 was up 1.2% and the S&P SmallCap 600 was up 1.1%.  Canadian equities gained during July, with the S&P/TSX Composite up 0.3%. The S&P Europe 350 gained 0.3% on the month. Asian equities were mixed in July on the back of increased regional and global trade concerns. In fixed income, Treasuries declined.

The risk that rates could move into negative territory would have dramatic consequences for the bond, equity, and currency markets in the United States. In response to this threat, we added gold across all models in August. Allocation to equities is now at 17% in Tactical Conservative, 22% in Tactical Moderate Growth, 36% in Tactical Growth, and 44% in Tactical Aggressive Growth. Equity exposure was maintained in the S&P 500 in all models. The S&P MidCap 400 was eliminated in the Conservative and Moderate Growth models and reduced in the Growth and Aggressive Growth models. Exposure to U.S. Municipal Bonds was reduced in the Conservative and Moderate Growth models.

We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

¹ J.P.Morgan. Global Data Watch. August 16, 2019.

² Trading Economics, China GDP Annual Growth Rate. July 15, 2019.

³ J.P.Morgan. Global Data Watch. August 16, 2019.

⁴ Trading Economics, Euro Area GDP. August 14, 2019.

⁵Trading Economics, U.S. Factory Orders. August 2, 2019.

⁶ Trading Economics, U.S. Economic Indicators. July 19th, 2019.

⁷Trading Economics, U.S. Currency Exchange Rates. August 21st, 2019.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. July 31, 2019. Index performance is based on total returns and expressed in the local currency of the index.

 

 

 

Our outlook is focused on tension between politics, policy and the positioning of the corporate sector. The world economy remains vulnerable to the U.S – China power play. If tariffs persist or are ramped up further, already weak world trade volumes will struggle to gain traction. In addition, rising political conflict (Brexit and Italy) and uncertainty have weighed on business sentiment over the past year and global capex is stalling. The dovish stance by central banks supports our Stagnation outlook for the U.S. economy as growth is capped over our forecast time horizon of twelve months.

China is committed to maintaining 6% growth and will respond to any slowing with further easing.¹ The U.S. and China have each raised tariffs and appear to be broadening the conflict to their respective tech sectors.  The results of the European Parliament elections showed a significant step up in support for populist parties, who now control 28% of total seats in Parliament, up from 22% before. Turnout in the elections was low at 37%, some 30%-35% lower than may be expected in a general election or second referendum.² The Brexit Party’s win (mostly at the expense of the Conservatives) sent the message that many voters are willing to support a no-deal.

In the U.S., the FOMC is ready to respond to slowing GDP and job growth.  Consensus expects two rate cuts later this year. Job growth has slowed through May, with the latest jobs report showing only 150,000 jobs added on average over the three months through May, down from a three-month moving average for job growth of 245,000 as recently as January.³ Trade policy could dampen growth further as most of the data reports that have been released to date cover a period before the recent escalations regarding tariffs toward China. The U.S. administration is using trade barriers as a tool of broader foreign policy and is signaling it will no longer defend the rules based global trading order it helped create over the past quarter century. The US dollar, still one of the world’s strongest currencies, has been trading at close to the highest levels in two years.

In Canada, there are signs that the recent economic slowing is giving way to a recovery as oil production curtailments are less frequent and housing markets have come off their bottom. The current 1.75% Bank of Canada policy rate is consistent with an economy operating at or near capacity. Economic growth is expected to settle around its trend pace of 1.7%. Population aging, private indebtedness, and modest productivity gains mean a slower pace relative to history.

In May, the trade war levied its toll, sending equity markets into reverse.  In contrast to the strong performance during the first four months of 2019, U.S. equities suffered. The S&P 500 lost 6.4%, while the S&P MidCap 400 lost 8.0% and the S&P SmallCap 600 lost 8.7%. Canadian equities posted losses in May, with the S&P/TSX Composite down 3.1%. The S&P Europe 350 dropped 4.7%, giving up all of April’s gains and moving into the negative territory for the second quarter. The S&P United Kingdom was down 2.9%. Asian equities dropped sharply in May. The S&P Pan Asia BMI declined 5.4%, with all 11 sectors finishing in the red. Fixed income performance was mostly positive, with Treasuries outperforming corporates. The 10-year U.S. Treasury Bond yield closed the month at 2.1%, down from the previous month’s yield of 2.5% (2.69% for year-end 2018, 2.40% for 2017, and 2.45% for 2016).

In June, we maintained the existing allocation between equities and bonds across all models. Allocation to equities remains at 30% in Tactical Conservative, 40% in Tactical Moderate Growth, 50% in Tactical Growth, and 60% in Tactical Aggressive Growth. Within equities, we eliminated exposure to the S&P SmallCap asset class and distributed the exposure equally between the S&P 500 and the S&P MidCap. We are of the view that smaller companies will feel the impact of the uncertainty that exists in the current climate while longer treasuries will continue to benefit from the downward pressure on interest rates and the relative attractiveness of interest rates in the U.S. versus the rest of the world.

Our outlook for 2019-20 has focused on tension between politics, policy, and the positioning of the corporate sector. Rising political conflict and uncertainty have weighed on business sentiment for a year and global capex is stalling. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

¹ South China Morning Post. China lowers 2019 GDP growth target to 6-6.5 per cent range. March 5, 2019.

² J.P.Morgan Economic Research. Global Data Watch. May 31, 2019.

³ Trading Economics, U.S. Non-Farm Payrolls. June 7th, 2019.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 31, 2019. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The current global economic expansion is already one of the longest in the post-war period, beginning in the second quarter of 2009 and now almost a decade long.  After three years of upgrades to global growth projections, the last three or four months have seen modest downgrades from organizations such as the IMF and the OECD ¹. Although we have a more favorable view of the U.S. economy than other areas of the world, we would note that the U.S. is not immune to the global growth slowdown. We continue to position our portfolio models to reflect our view that the U.S. will continue to experience Stagnation over the next twelve months.

Central banks have softened their stance on actual or expected policy tightening, with most citing downside risks either to their own or global economy as their reasoning. European economic growth continues to disappoint. Brexit has hung over Britain for the last three years. It has contributed to weaker growth in the U.K. and to the gloomier sentiment among both businesses and households. In Germany, concerns in the auto industry (transition to a new emission testing regime) and a low level of Rhine water were temporary drags on activity. Italy suffered from a blow to confidence and tighter financial conditions amid the quarrels over the 2019 budget proposal. In France, yellow vest protests and a low approval with President Macron continue.

China’s economy may re-accelerate as a result of lower interest rates, a resolution to the trade conflict, and more economic stimulus. Q1 Chinese GDP growth came in at an estimated 6.4%, exceeding expectations ². Growth was supported by a jump in industrial production and in retail sales. China has cut taxes, lowered short-term interest rates, and revved up infrastructure spending.

In March, the U.S. Fed’s Beige Book reported a slight increase in growth, as the negative impact of the government shutdown was seen in autos, restaurants, and manufacturing, where consumer spending was slow ³. U.S. job growth in March returned after a weak February as 196,000 jobs were created, easing recession fears. The unemployment rate held steady at 3.8% ⁴. The Fed met and left interest rates unchanged, signaled that there would be no additional interest rate increases for 2019 and that it would end its balance sheet reduction in September. Canada’s three points of potential friction are commodities, the U.S., and China. Canada’s trade deficit narrowed to $4.2 billion in January from a record $4.8 billion shortfall in December ⁵. Lower crude oil prices were behind Canada’s wider trade deficit toward the end of last year.

The S&P 500 completed its best quarter since 2009, gaining 13.6%, while the S&P MidCap 400 and S&P SmallCap 600 gained 14.5% and 11.6%, respectively. Canadian equities gained this quarter with the S&P/TSX Composite up 13.3%. International markets also rallied in the first quarter, with the S&P Europe 350 up 13.2%, S&P United Kingdom up 9.9% and S&P China 500 up 21.0%. The U.S. dollar appreciated slightly in the first quarter, with the U.S. Dollar Index (DXY) rising 1.2%. The euro declined 2.2%, and the yen declined 1.1%, while the Canadian dollar was up 2.2% and the Mexican peso was up 1.1% against the dollar. Oil also gained in Q1, driving the S&P GSCI up 15.0% and the DJCI up 7.5%. Tailwinds included supply cuts from OPEC and U.S. sanctions against Iran and Venezuela.

In March, the S&P 500 gained 1.9% while the S&P MidCap 400 and S&P SmallCap 600 declined by 0.6% and 3.3%, respectively. Canadian equities gained with the S&P/TSX Composite up 1.0%. European equities were also positive as the S&P Europe 350 gained 2.3% and the S&P United Kingdom gained 3.3% on the month. The U.S. Treasury 10-year yield fell below money market rates, a signal some perceive as an indicator of recession.

In April, we held our asset allocation constant at the March allocations. Allocation to Equities remains at 30% in Tactical Conservative, 40% in Tactical Moderate Growth, 50% in Tactical Growth, and 60% in Tactical Aggressive Growth. We continue exposure to U.S. equities, with the balance in all models allocated to U.S. municipal bonds and mid-term U.S. treasuries. This asset allocation continues to reflect our concerns that the U.S. economy is slowing but is more stable than other global equity markets and the relative attractiveness of U.S. interest rates versus the rest of the world.

We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

¹Aviva Investors. House View, Q2 2019.

²Trading Economics, China GDP Annual Growth Rate. April 17, 2019.

³The Beige Book. Summary of Commentary on Current Economic Conditions By Federal Reserve District. March 6, 2019.

⁴Bureau of Labor Statistics. Labor Force Statistics from the Current Population Survey. Unemployment Rate.

⁵Trading Economics, Canada Balance of Trade. April 17, 2019.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 29, 2019. Index performance is based on total returns and expressed in the local currency of the index.