Geopolitical risks are expected to dominate global asset class performance over the coming months. Consideration of ongoing trade tensions and the aftermath of the U.S. government shutdown have led us to revise our forward outlook to reflect our view that the U.S. economy will experience stagnation over the next twelve months.

While still undergoing revisions, global growth in 2018 is estimated to have been 3.7%, with signs of a slowdown in the second half of 2018 leading to downward revisions for several economies.  Growth in the Euro area is set to moderate from 1.8% in 2018 to 1.6% in 2019 and 1.7% in 2020. Growth rates have been marked down for many economies: Germany, due to soft private consumption, weak industrial production following the introduction of revised auto emission standards, and subdued foreign demand, Italy, due to weak domestic demand and higher borrowing costs as sovereign yields remain elevated, and France, due to the negative impact of street protests and industrial action.  China’s economy slowed in 2018 mainly due to financial regulatory tightening to rein in shadow banking activity, and the widening trade dispute with the United States. Growth in emerging and developing Asia is expected to decline from 6.5% in 2018 to 6.3% in 2019.1

The FOMC made a major dovish shift at the January meeting as the balance of risks had shifted dramatically over prior weeks due to disappointing global growth and tightening financial conditions. In January, solid job creation and wage gains were reported, but the December retail sales report indicated that total retail sales plunged 1.2%, the most in any month since 2009.2 Headline CPI was flat in January, held down by a large 3.1% drop in energy prices, particularly gasoline. The ex-food and energy core CPI increased 0.24%.3 The timing and composition of the increases hint that tariffs may be playing a role in this surge in core goods prices. Increases have been firmer in some areas where Chinese goods have a sizable presence, such as household furnishings, video and audio products, and apparel, but less so in categories such as vehicles, where China is not significant in US markets.3 Growth for the United States is expected to decline slightly to 2.5% in 2019 with the unwinding of fiscal stimulus.4

Unlike the final month of 2018, U.S. equities started 2019 strong. The S&P 500 gained 8.0%, while smaller caps did even better, with the S&P MidCap 400 up 10.5% and the S&P SmallCap 600 up 10.6%. U.S. bonds gained across the board, with corporates outpacing Treasuries in line with the shift in confidence and muted inflation pressures. Chinese equities had a strong month as the S&P China 500 gained 7.3% given the continued trade negotiations with the U.S., and despite continued fears about slowdowns in both global and domestic growth. European equities rallied in January with the S&P Europe 350 finishing the month with a gain of 6.2%, the best monthly total return for the benchmark since October 2015. Canadian equities started the year on a positive note, with the S&P/TSX Composite gaining 8.7%, and the Canadian dollar firmed due to the rebound in crude prices and the U.S. dollar weakness. Oil prices were higher as OPEC and allies followed through on pledges to cut production at the beginning of the year, while the political crisis in Venezuela also threatened to disrupt supply. Gold posted its fourth straight monthly gain after the Fed signaled a more dovish stance, and the US dollar weakened. Central banks reacted to rising macroeconomic and geopolitical pressures by bolstering their gold reserves. Russia, which is “de-dollarising” its reserves, bought 274.3 tons of gold in 2018, funded by the almost total sale of its U.S. Treasuries portfolio.5

In February, we held our asset allocation constant at the January 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, continuing the 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 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


1International Monetary Fund, World Economic Outlook. January 2019.

2Trading Economics, U.S. Retail Sales. January 2019.

3JP Morgan, Global Data Watch. February 15, 2019.

4International Monetary Fund, World Economic Update. January 2019.

5World Gold Council. Gold Demand Trends Full year and Q4 2018. January 31, 2019.


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