Recent reasons to hope for a more stable global economy in 2019 are contending with reasons to worry. Hope has come from the temporary U.S./China tariff truce and an oil supply shock that will positively impact global consumer spending next quarter. Concern remains as global geopolitical risks escalate, and the fading benefit of fiscal stimulus combined with tighter monetary policy in the U.S. is causing a slowdown in rate-sensitive sectors that will spread to the broader economy and beyond the U.S. borders if not addressed. Global business surveys indicate declines in activity in China and softness in most European countries. In December we revised our twelve-month forward outlook to reflect the delayed impact of inflation on the U.S. economy. We continue to believe that U.S. economic growth is moving toward an inflationary environment that will likely precede a recession in late 2019 or in 2020. The current outlook now factors in six months of growth followed by six months of inflation over the twelve-month forecast period.

The outlook for the euro-zone has deteriorated in recent months as business and consumer sentiment has softened and GDP growth has slowed. Negotiations over the UK’s withdrawal from the EU are likely to go down to the wire. Italy’s economy is expected to go into recession next year, raising fresh doubts about the sustainability of its public debt. The French government is facing significant pushback to implementing additional structural reforms. In Japan, the impact on potential growth of allowing entry to foreign workers under a new law can be equated to a rise in the labor participation rate of 5 percent, doubling the current pace. 1

The tension between the U.S. and China is more about rules governing direct investment, intellectual property, and technology theft than it is about the current U.S. trade deficit with China. The U.S. has hit $250 billion of Chinese goods with tariffs since July, and China has retaliated by imposing duties on $110 billion of U.S. products. China is tracking a 6.1% real GDP gain this quarter, but there are signs that domestic demand continues to struggle. 2 A 2.9% drop in exports held back factory output, even as shipments to the U.S. rose. If the pre-tariff price of Chinese exports to the U.S. declined by as much as 10% under a scenario in which a 25% tariff is levied on all US imports from China, it would still result in a serious inflationary hit to the remaining $267 billion of annual Chinese exports to the U.S. 3

The modest 155,000 job rise in U.S. non-farm payrolls in November reflected a broad-based slowdown across sectors. 4 The November Consumer Price Index (CPI) was flat (0.02%), while the ex.-food and energy core CPI increased 0.21%. A 2.2% decline in energy prices held down the headline. 5

After October’s sharp declines, U.S. equities returned to positive territory in November. The S&P 500 was up 2.0%, while the S&P Midcap 400 gained 3.1% and S&P Smallcap 600 gained 1.5%. Canadian equities returned to positive territory in November, with the S&P/TSX Composite up 1.4%. Global trade uncertainty and declines in commodity prices factored into the S&P Europe 350 declining 0.8% in November. The S&P United Kingdom dropped 1.4% as markets waited on the outcome of Brexit negotiations. Emerging markets rebounded from October’s losses, with the S&P Emerging BMI up 4.7%. The S&P Pan Asia BMI gained 3.3%, with the negative exception being Australia. S&P China 500 gained 3.7%.

In December, we continued to maintain our current asset allocation across all models. Allocation to Equities will remain at 30% in Tactical Conservative, 40% in Tactical Moderate Growth, 60% in Tactical Growth, and 70% in Tactical Aggressive Growth, providing exposure to U.S. equities, with the balance in all models allocated to U.S. municipal bonds and medium-term U.S. treasuries. This asset allocation is reflective of the current relative attractiveness of interest rates in the U.S. 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


1 Capital Economics, Global Economics Update. December 14th, 2018.

2 JP Morgan, Cross Asset Strategy. December 14, 2018.

3 CNN Business, “The trade war is pushing business out of China, but not into America.” November 16th, 2018.

4 Trading Economics. U.S. November Non-Farm Payrolls.

5 Trading Economics. U.S. CPI, November 2018.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. November 30th, 2018. Index performance is based on total returns and expressed in the local currency of the index.