March 2018

In March, we continued our Growth Outlook for the next six months followed by Inflation for the following six months. Fundamentals (job growth, corporate profits, corporate and consumer confidence) remain very strong globally for now even as manufacturing downshifts. The commitment by President Trump to impose tariffs on China would be the main driver of U.S. inflation by way of higher prices on all goods subjected to these tariffs coming into the U.S. from China. Any retaliation by China would negatively impact exports from the U.S to China and collateral damage to other economies would most likely have a negative impact on growth globally.  Independent from the tariffs, we expect China will continue to lose momentum through 2018.  The news that North Korea, South Korea and the U.S. may meet to discuss reducing tensions on the peninsula has contributed to lower volatility in March. In Europe, retail sales and Industrial production data have disappointed in January and the subdued pace of core inflation and wage growth has kept the ECB moving very slowly toward the end of easing. Global growth is still expected to come in at 3% for 2018.

The U.S. economy is now in the late stages of the business cycle. Employment growth has been decelerating for several years and productivity growth is sluggish. Any boost from Trump’s fiscal stimulus would be short lived and the cumulative effects of monetary policy tightening would take a toll. The U.S. Federal Reserve raised the prime lending rate by 0.25% on March 20. The new Fed Chair, Powell’s, first conference largely echoed the messages of his predecessor, Janet Yellen.

During March, a seventh round of NAFTA talks concluded in Mexico City. Negotiations are advancing slowly with only 6 out of 30 chapters completed. Tensions continue to flare regarding Trump’s plan for steel tariffs. Progress was not made on more controversial issues such as dispute resolutions, national content, and the sunset clause. The decision to exclude NAFTA countries from steel and aluminum tariffs was encouraging, even if its conditionality on NAFTA being completed was ill-received by Mexico and Canada. If limited progress continues, it is unlikely NAFTA negotiations will be completed until 2019, especially with elections approaching in both Mexico and the United States.

Global equities had a rough ride in February. The S&P 500 ended the month down 3.7% while the S&P MidCap 400 and the S&P SmallCap 600 lost 4.4% and 3.9%. Canadian equities were negative with the S&P/TSX Composite down 3.0%. International markets performed poorly as the S&P Europe 350 lost 3.9%, and the S&P Developed Ex-U.S. BMI and the S&P Emerging BMI posted losses of 4.6% and 4.1%, respectively.

Interest rates rose across the board, negatively impacting February performance in U.S. fixed income. The S&P 500 Bond Index lost 1.5% in February, as the pull back in corporate bonds extended throughout the credit spectrum.  For the first time in four years, the yield on the 10-year U.S. Treasury hit 2.90%. Commodities were also down in February, with the S&P GSCI and the DJCI down 3.3% and 1.9%, respectively.

Due to the updated outlook that adds Inflation in the back half of our twelve-month forward time horizon, we shifted within the U.S. equity market cap exposures in all models. We reduced exposure to the S&P 500 across all models and shifted that exposure to different equity segments. In Tactical Conservative, we shifted to the S&P MidCap. In Tactical Moderate Growth, we shifted to the S&P MidCap and the S&P SmallCap. In Tactical Growth and Tactical Aggressive Growth, we shifted to S&P SmallCap. Over the twelve-month time horizon used in our model creation, we expect global growth around 3% and inflation in the G7 economies close to 2%.

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

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Fixed Income. February 28, 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.