In September, we maintained our outlook to reflect the impact of escalating global trade wars. We are currently factoring in a six-month period of Stagnation followed by six months of Inflation.

During 2018, global growth appears to have peaked at 3.8% after picking up steam through the second half of last year1. We expect further moderation due to weakening emerging markets momentum driven by investor capital outflows and currency depreciations.

Following a stellar 2017, activity in the Euro Area has slowed due to decreasing foreign demand. The ECB is expected to end its asset purchase program this December, while the Bank of England will likely remain on hold with their program at least until after Brexit is official next March. The UK and EU are expected to come to terms on a withdrawal agreement before the end of the year, which should prevent a chaotic exit scenario. Japan’s economic momentum should move in the opposite direction, expecting to strengthen in 2019 due to a temporary boost in infrastructure spending for the summer 2020 Olympic Games. The more material and pressing issues among the list of global risks are China-U.S. trade tensions and escalation in the global trade war.

The U.S. is leading the global charge, thanks to widespread momentum across the consumer and manufacturing sectors. A double dose of fiscal stimulus provided a boost to an already buoyant economy, as Q2 GDP was reported at 4.2%2. The case for more Fed tightening hinges on inflation returning, which the Fed assumes will happen and is talking about hiking rates well ahead of the economic data release and market expectations. As central banks raise interest rates gradually, the US dollar should weaken. The second quarter’s drop in the trade deficit is reversing. The July trade deficit jumped to $50.1B from a downwardly-revised $45.7B in June, in line with expectations and the advance data. The core story behind all the noise is that strong domestic demand is drawing in imports, offsetting the gains in exports. However, the underlying picture is not as bad as the headlines would lead to believe. Soybean exports fell by $0.7B, the beginning of the unwinding of the export surge triggered by China’s advance notice that it would impose tariffs on U.S. soybeans, effective July 63. Meanwhile, the Canadian economy is moderating towards a more sustainable, albeit above-trend pace, though the fate of NAFTA is clouding the outlook.

August provided strong returns for U.S. equities. The S&P 500 gained 3.3%, as economic strength and strong corporate earnings boosted returns. Small caps outperformed large, with the S&P SmallCap 600 up 4.8%. Conversely, most non-U.S. markets declined in August. European equities were down amid a worsening environment for international trade, with the S&P Europe 350 off 2.3%, nearly wiping out its year-to-date returns. Italian equities and bonds had a poor month, influenced by concerns over the exposure of Italian financial institutions to the pressured Turkish economy. The S&P United Kingdom dropped 3.4% after the pound sterling rose sharply against the euro over the last few sessions.  E.U. chief Brexit negotiator Michel Barnier’s comments on a potentially unique trade deal triggered the sterling response. Canadian equities declined, with the S&P/TSX Composite down 0.8%.

In September, we increased our exposure to U.S. equities across all models to 40%, 50%, 60%, and 70% in the Tactical Conservative, Moderate Growth, Growth and Aggressive Growth models, respectively. This is consistent with our recognition that the tax cuts from earlier in the year are having a short-term positive impact on the U.S. economy that is more than offsetting the uncertainty created by the trade wars initiated by the U.S. on China, and on other trading partners including Canada and Mexico. We added this net new exposure to U.S large caps, with additional exposure coming out of U.S. small cap.

The combination of synchronized global growth and improved commodity prices are expected to contribute to worldwide inflation, though not to levels over the next six months that would threaten the status of the economic recovery. This reflationary backdrop bodes well for equities and commodities (excluding gold) at the expense of fixed income and the US dollar.

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 TD Economics. Quarterly Economic Forecast. September 18, 2018.

2 U.S. Department of Commerce. Quarterly GDP Estimate Release. August 29, 2018.

3 Pantheon Macroeconomics. The Weekly U.S. Economic Monitor. September 4, 2018.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. August 31, 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.