In July, we updated our outlook to reflect the impact of the escalating global trade wars. We are now factoring in a six-month period of Stagnation followed by six months of Inflation. While the baseline forecast for the global economy continues for 2018 and 2019, the potential for disappointments has increased.

The WTO issued a monitoring report in July on G20 trade measures covering the period from mid-October 2017 to mid-May 2018. The report shows that a total of 39 new trade-restrictive measures were applied by G20 economies during that period¹. These measures include tariff increases, stricter customs procedures, imposition of taxes and export duties.

The IMF’s World Economic Outlook forecast from April 2018 for global growth is in line with projections to reach 3.9% in 2018 and 2019². Risks to the outlook are increasing amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018 and among emerging markets, projections have been revised down for Argentina, Brazil, and India. In the Euro economy, growth is projected to slow gradually from 2.4% in 2017 to 2.2% in 2018 and 1.9% in 2019. Forecasts for Germany, France and Italy have been revised down for 2018. Japan’s growth forecast was reduced to 1.0% for 2018 following a tightening in the first quarter due to weak private consumption and investment. The slowing of China’s economy amid an escalating trade war was evident as the country continued to restrict credit growth, putting the brakes on the world’s second-largest economy. China generates about a third of global growth.

With firmer readings on inflation and strong job creation, the US Federal Reserve continued the course of gradual policy normalization, raising the target range for the Federal Funds rate by 25 basis points in June, while signaling two additional rate hikes in 2018 and three in 2019. The percentage of small businesses reporting price increases remains near a 10-year high in June, at 14%. While U.S. government debt was downgraded by the S&P to AA+ in 2013, the other two main rating agencies are expected to follow suit as the federal deficit is expected to grow in the aftermath of federal tax cuts.

June was an unstable month with U.S. equities ending the second quarter with gains across all cap sizes. Over the quarter, the S&P 500 gained 3.4% and the S&P MidCap 400 was up 4.3%. Small caps widely outperformed, cushioned from trade tensions, as the S&P SmallCap 600 gained 8.8%. In June, the S&P 500 gained 0.6%, the S&P MidCap 400 gained 0.4% and the S&P SmallCap 600 gained 1.1%. Canadian equities also gained in Q2 with the S&P/TSX Composite up 6.8% and 1.7% in June. The Canadian economy has benefited from the rise in oil prices that began in February. The Bank of Canada hiked its overnight rate target 25 basis points to 1.50% in July. The S&P Europe 350 fell by 0.6% in June as trade tensions and European political risk soured sentiment although gains earlier in the quarter meant the S&P Europe 350 finished the quarter with a gain of 4.4%.

In fixed income, the S&P 500 Bond Index lost 0.4% in June. The S&P U.S. Aggregate Bond Index was flat in June with MBS, covered bonds, taxable municipals and investment-grade corporates reporting losses for the month.

As we continue to watch the impact that the U.S. led trade war is having on the U.S. economy and the ripple effect to trading partners, we maintained the asset allocation and the same exposures that we introduced in June. This asset mix has worked well in our shifted outlook to Stagnation followed by inflation over the next twelve months.

We will continue to monitor the data for growth 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 WTO OMC. Report on G20 Trade Measures (Mid-October 2017 to Mid-May 2018). July 4, 2018.

² IMF. World Economic Outlook Update, July 2018: Less Even Expansion, Rising Trade Tensions.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Fixed Income. June 29, 2018. Index performance is based on total returns and expressed in the local currency of the index. European regional index returns are expressed in Euros.