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Markets give Warm Welcome to 2019

January markets have been a warm welcome to 2019 in spite of the cold outside.  In Canada, the S&P/TSX index as of Jan 29, 2019  gained 13% since Christmas Eve.

In the US the S&P 500 is up 5.4% so far this year and the Nasdaq up 16%, with the possibility of reaching the best January in decades, and bouncing off of December’s lows.  

Where we came from:

Stock markets ended the year 2018 ended with a bust.   In Canada, the S&P/TSX composite  index declined 12% in 2018 from 16,209 points to 14,200 points.   The S&P/TSX corrected in February and hit a peak of 16,586.46 in mid-July and then pulled back 7.1%  from 15,300 points to 14,200 points in the month of December alone.  Bank stocks and the financial sector, the largest on the TSX , dropped nearly 15 per cent, hurting many of the conservative, mature, dividend-paying portfolios.   Energy, the second largest sector, dropped almost 32 per cent as the global price of West Texas Intermediate dropped by about 26 per cent and Canadian crude prices were punished by a lack of pipeline capacity to get oil out of Canada.

 

The US stock market had its worst month of December in decades, weighted down by worries about US-China trade dispute as well as a US government shut-down.  The Dow Jones Industrial Average lost over 8.5% bringing it’s 2018 number to -5% and the S&P500 and the Nasdaq indices lost 9% in December.  The FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) posted double-digit gains earlier in the year, that came back to the normal range in December.  It was even difficult to make money in a typical balanced portfolio in 2018, with fixed income returns weakened by rising interest rates.

 

What’s with the volatility?

The big market movements came with news of trade and tariff tensions, rising inflation and interest rates, and a correction after a run up in FAANG stocks.   In Canada, we were more vulnerable to the drop in global oil prices.  The rate of global growth is slower, and after the longest period of economic expansion in decades, investors fear a recession and over react to potential triggers.

Many analysts continue to say they are not expecting a recession this year.  Manulife Chief Investment Strategist Philip Petursson states the risk of a recession in 2019 are low, showing that Global Manufacturing Purchasing Managers Index is positive in most developed nations, and noting that the typical signs of a recession are not currently present:

 

Sign of Recession Present today?

Inverted yield curve                                                 No

Purchasing Managers Index below 45                     No

Positive inflationary trends                                        No

Capacity utilization above 80%                                 No

Housing starts declining                                            No

Labour market weakening/growing unemployment   No

Leading economic indicators negative                      No

Corporate profits down/below expectations              No

 

So if the underlying economy is growing, and the stocks represented in the markets are profitable, why do we see this volatility?  Market weakness while the economy is expanding is typically followed by strong returns, as investors recover from their jitters and realize the sky is not falling.   The pullback we had in the market in December was not justified by the strong economic fundamentals.  No, instead the pullback was justified by investor sentiment, emotions, and good old fashioned fear.  Short-term markets can be emotional, triggering fear or greed for even small announcements or events.

 

Investors who have more research or knowledge about the corporate fundamentals of their holdings typically have more confidence in their holdings, and are less likely to react to the stock market price movements.   An investor who relies on fundamentals is one who looks at the long-term correlation between corporate earnings growth and share prices, and fundamental or value investing prevails over time.   However, in today’s markets, many stocks, including those managed by hedge funds and Exchange Traded Funds (ETF's), are traded not based on corporate fundamentals, but on short-term prices, computer modelling, algorithms, and futures contracts.  These high volume traders can influence the short-term share price and market volatility.  We have seen the typical holding period and investment time frames reduced.

We encourage you to trust in the professionals who have researched your holdings and who have worked with you to provide this information and to ensure your portfolio matches your risk tolerance, time horizon, income needs and other goals.   Please contact us should you have any questions about your portfolios.

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