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.