November 2017

In November, we continued our Growth outlook for the next three months, reverting back to Stagnation for the following nine months. Synchronous global growth is expected to remain in place for 2017. Contributions to this growth include inflation standing below most central banks’ 2% objective, G3 capital goods orders climbing at the fastest pace since 2014, and 68% of OECD nations have unemployment rates under the organization’s assessment of “global NAIRU” (Non-Accelerating Inflation Rate of Unemployment) ¹. Either aggressive central bank actions, a worldwide trade war, escalating tensions in Northeast Asia or a combination of all three are risks to this synchronized global growth.

The recent upswing in euro area growth indicates that factors are well positioned to continue to drive growth although labor market slack will need to be absorbed. The Japanese economy is growing at the fastest pace in several years, while Prime Minister Abe’s election victory guarantees the continuation of expansive monetary and fiscal policy for the future. China’s economy continues to defy expectations for a sharp slowdown and has been in stabilization mode, and is on its way to meet the government’s growth target this year of 6.5% or above.

The U.S. economy proved resilient to hurricane distortions in August and September and rose at a 3.0% annualized rate during the third quarter². Improving economic activity outside the United States is a tailwind for U.S. economic growth and profits of American firms with significant foreign business while overseas demand and a softer greenback have helped the U.S. manufacturing sector. The consumer continues to thrive in the environment of strong job creation while higher stock values and business investment are also contributing positively.

The Federal Reserve is expected to pursue its plan to raise interest rates once again in December although the flattening of the yield curve over the past couple of months has sent a message that the market does not agree with the Fed regarding the strength of the current economic cycle. The flattening yield curve has historically been a signal that a recession is on the way but the decline in the 10-year Treasury yield since the start of this year is due to a drop back in the term premium component, with the implied risk-free short rate expectations component continuing to trend higher. This reflects foreign interest that results from less attractive options abroad due to the continuing expansion of other major central banks’ balance sheets, low and stable inflation and a rebound in global savings.

After a strong first half to 2017, the Canadian economy moderated towards more sustainable levels in Q3. The Bank of Canada has reduced expectations for further rate hikes in the near-term as the economy adapts to previous rate hikes and new mortgage rules, while downside risks pertaining to NAFTA negotiations and elevated consumer debt levels also warrant some caution.

Global equity markets were broadly higher in October. U.S. equities rose again with the S&P 500 up 2.3%, the S&P MidCap 400 up 2.2% and the S&P SmallCap 600 saw smaller gains of 1.0%. Canadian equities have been performing well, with the S&P/TSX Composite Index rising 2.7% for the month. Equity gains extended to overseas markets, with the S&P Europe 350 rising 2.0%, MSCI Japan Index up 5.6% and MSCI Australia Index up 3.8%.

North American fixed income markets diverged in October as the S&P 500 Bond Index gained 0.37% for the month and stood at 5.23% for the year ending October. In currency markets, the U.S. Dollar strengthened for the month as speculation mounted regarding the Federal Reserve chairmanship and specifics on plans for tax reform. However, since the start of 2017 to the end of October, the U.S. Dollar Index (DXY) is down 7.5%.

In November, we added exposure to the broader Pacific Region including Australia, Hong Kong, New Zealand and Singapore, by replacing direct exposure to Australia. We also added exposure to Asia ex Japan. Under fixed income, we reduced exposure to Long Treasury and Muni bonds in the Conservative and Moderate Growth models and reduced Muni Bonds in the Growth model.

 

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 BCA Research. U.S. Investment Strategy. November 13, 2017.

² Capital Economics. U.S. Economics. U.S. Rapid Response. October 27, 2017.

 Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Fixed Income. October 31, 2017.  Index performance is based on total returns and expressed in the local currency of the index.  European regional index returns are expressed in Euros.