In 2017 we saw synchronized growth in the world’s economies; in 2018 the global markets moved out-of-sync with each other and away from harmonized growth. This desynchronization of the world’s economies caused the U.S. dollar to strengthen and led the Federal Reserve to continue to raise interest rates in an effort to normalize monetary policy. Meanwhile both the European Central Bank and the Bank of Japan have remained stuck in negative interest rate territory.
In 2018, at times the U.S. economy seemed to be the only bright spot; strong markets pushed the dollar higher while European markets slowed. A higher U.S. dollar was also a challenge for the Emerging markets as their sensitivity to a rising greenback resulted in economic underperformance.
The U.S. consumer was the engine of growth for the American economy in 2018. The strength of the U.S. economy was an important investment theme throughout the year. Tax reform legislation at the end of 2017 helped boost the economy into 2018 as well as some U.S. business investment; although not as much as economist had originally expected.
Now all eyes are watching for signs that growth has peaked south of the boarder. Real interest rates are back in positive territory as a result of the Federal Reserve increasing rates 8 times since 2015. It is expected that interest rates will continue to rise 2019 just at a slower pace. This should continue to support a strong U.S. dollar however, increased rates usually lead to added risk for both corporate bonds and the stock market, which may cause some investors to become nervous.
Following a stellar year in 2017, the Canadian economy cooled off in 2018. The renegotiation of NAFTA weighed on the economy and stock market most of the year. However, now with a deal in place it should help boost the confidence of corporate Canada and lead to a greater amount of investment from the business sector. The Bank of Canada seems to be following the Federal Reserve’s slower pace of increasing interest rates. The disappearance of uncertainty around trade with the U.S., along with an historically low unemployment rate, leads economists to believe Canada will see at least 3-4 rate hikes in 2019.
Market watchers are now keeping their eye on long-term interest rates. If long-term yields (interest rates on bonds) become lower than short-term yields, it is called ‘an inversion of the yield curve’. Experts agree that such an ‘inversion’ is a leading indicator of a recession. However, it is the general consensus a recession is not expected in the next 12 months.
Finally, after several years of low volatility in the markets, we have seen it comeback with a vengeance in 2018. With slowing global growth and rising interest rates we shouldn’t be surprised to see volatility continue into 2019.
But volatility does not mean doom and gloom. Volatility means the markets swing both ways; as they did on December 26th when the Dow gained over 1000 points or 5% in just one day. Certainly these conditions are ideal for active money managers who don’t hesitate to put money to work when most investors are too afraid to do so.
Have a great weekend,
Tracey
Source: Original article written by Clement Gignac, Senior Vice-President & Chief Economist, iA Financial Group, Portfolio Manager, Industrial Alliance Investment Management Inc. 2019 Market Outlook, iA Clarington Investments.