The Market

We’ve written before about the importance of “staying the course” with investing and how it is often easier said than done.  This past quarter is a clear reminder that investor behavior could be your own worst enemy.  We invite you to read about it, here.

The previous quarter has certainly tested investors by pulling them along a tumultuous ride as markets rallied over 8% in 1Q2019 after the December 2018 correction, and then retreated shortly thereafter, in early 2Q2019.  Rinse and repeat as the markets are now back up, testing all time highs on the S&P 500 at quarter end.

Much of the risk-off sentiment was driven by continued geopolitical turmoil with no resolution in sight for the US-China trade conflict, Brexit, and increasing US-Iran tensions thanks to threats over Twitter between US President Trump and Iranian President Rouhani, the latter of which has driven WTI and Brent crude oil benchmarks up to four-week highs as of the end of June.

The US Fed decided in June to hold short term borrowing rates steady, with a dovish¹ tone.  This caused the Canadian dollar to climb, relative to the Greenback (US dollar), however this will likely be temporary as it is anticipated that the Bank of Canada will also follow suit by holding their rates constant as well.  We can expect this decision to be announced on July 10, 2019.

Finally, US and Canadian 5 year bond yields continue to push lower, with both country’s yield curve inverting between the 2-5 year spreads, and flat throughout the remaining maturities, signalling a decrease in confidence of bond market participants as they flee to higher quality issues.

The table below shows the market performance as of June 30, 2019 in Canadian dollar terms.

Performance

Due to our conservative stance, the YouFirst Growth composite at 8.7% and the YouFirst Conservative Growth composite at 7.7% trailed the FPX Growth and FPX Balanced benchmarks by about one percent, respectively, on a year to date basis.

Portfolio Activity

In keeping with the “ESG” principles article written by Simon Chun, we introduced iShares MCSI USA ESG Select ETF (SUSA – NYSE) and Manulife (Mawer) International Equity Private Trust to a few portfolios. SUSA covers the US market while the Manulife (Mawer) trust represents the International (non US) market.

We sold our holdings of Wisdomtree Emerging Market Dividend Growth ETF (DGRE – NYSE) because its mandate had recently changed, it’s underperforming the passive emerging market benchmark, and in a market downturn emerging markets tend to be impacted first.

Outlook

The past quarter has been plagued with increasing optimism in the face of several contradictory leading economic indicators.  The stock market is testing all-time highs, yet corporate profits had the largest decrease since 4Q2014, declining 3.1%, and the bond market has contrarily been strong (rarely do bond prices rise and yields drop while stocks continue to push higher).

The US Purchasing Managers’ Index (PMI) has also fallen from 52.1 to 51.7.  The latest monthly reading pointed to the weakest pace of expansion in the manufacturing sector since October 2016 as the new order index dropped to the lowest level since December 2015 and the prices paid index fell to a three-year low.

Furthermore, the Street continues bird watching¹, as the CME Group (futures market) forecasts an 89% probability for a 25bps US rate cut in July.  Will the decrease in rates bring a renewed excitement to stock market valuations, or will it be an indication that the Fed has acknowledged that we are clearly in troubled economic times? 

  We’re often asked, “is there a recession coming?”, and our answer is usually the same.  Yes, we are due for a correction.  However, the answer of when it will happen, is unknown.  The longest bull market run in history was 10 years.  We are now approaching the 11^th year since the Great Recession of 2009 so we are entering uncharted territory. 

Now that Trump’s 2017 corporate tax cuts have been digested by the market, corporate earnings will continue to be the focus and main driver of pushing equity indices to newer highs.  We continue to be cautious and believe that we are nearing the top of the now longest running bull market in history.  Due to this, we are continuing to maintain lower than normal equity allocations in portfolios to minimize downside losses in the face of an eventual pullback.  While we lack the ability to forecast the future with crystal ball clarity, the words of Mark Twain summarize this sentiment most eloquently, “history never repeats, but it does rhyme.”

¹ You may hear the terms “hawkish” and “dovish” being thrown around and it’s unrelated to bird watching.  A “dovish” sentiment, means that policy makers favour looser, more accommodating monetary policy by lowering rates.

Doug Garner, P.Eng., CFA
President, Portfolio Manager

Jane Garner, BA, EPC
VP Operations and Client Experience

Simon Chun, P.Eng., CFA Level III Candidate
Investment Analyst