January 04, 2018 – KERR MARKET SUMMARY
The hope was that markets would end the year on a positive note, but it was proven once again that hope is not an investment thesis. December was another month filled with daily ups and downs, but the trend was clearly negative, as much of the same factors that plagued the market in October re-surfaced in December.
On the economic front, the current trends that we’ve seen over the past six to eight months persisted. The U.S. economy remains strong with few signs to suggest a change in trend, although we should continue to expect some slowing from higher interest rates, as well as ongoing trade conflicts and decelerating global economic activity. Canada appears to have joined the rest of the world with weaker economic growth expected primarily due to the energy sector, which has been particularly hard hit by the combination of sharply lower oil prices and pipeline capacity constraints. While lower energy prices are helping to dampen inflationary pressures globally, the negative impact on Canada’s economy far outweighs the positives. Overall, the tone has shifted from one of optimism to one of caution regarding global economic growth.
As expected, the Bank of Canada left its target for the overnight rate unchanged at 1.75% at its December 5th meeting, citing several negative expectations in its statement, including materially weaker activity from Canada’s energy sector, a greater-than-anticipated negative impact on global economic activity from trade conflicts and reduced momentum in Canadian economic growth. The Fed, on the other hand, increased its target range for the fed funds rate by 25 bps to 2.25-2.50% just before the holidays. While the Fed continued to describe the U.S. economy as strong, its guidance was modified somewhat to suggest that going forward there may be fewer interest rate hikes than previously anticipated. It is worth noting that in both the U.S. and Canada inflationary pressures remain benign. Government bond yields declined again in December across the yield curve as market participants fled equity markets in search of a safe haven. Not only did government bonds benefit from the “risk off” tone, but a change in sentiment is taking place regarding future interest rate hikes – some are beginning to anticipate that the Bank of Canada and the Fed’s next move could be an interest rate cut rather than an increase. The decline in interest rates was once again a boon for investors holding government bonds, but holders of corporate bonds did not fare quite as well. Corporate credit spreads widened further in December, with high yield bonds and leveraged loans bearing the brunt of the action. For the month, the FTSE Canada Overall Universe (broad Canadian bond market) returned 1.4%, while the FTSE Canada Corporate Universe returned a smaller 1.1%. The DEX High Yield Bond index (Canadian high yield market) returned -0.21% for the month.
Typically, equity markets quiet down in December but the action this year felt a lot like a repeat of October, with trade-related uncertainty and slowing global economic growth the primary drivers of the equity market sell offs. Concerns about the U.S. government shutdown and tax loss selling in the latter part of the month exacerbated the already negative sentiment. Very few equity markets were spared in December in local currency terms, but for Canadian investors the broad emerging markets were a bit of a bright spot with the MSCI Emerging Markets Index up 0.1% in CAD. Compared to our counterparts south of the border, the continued decline in the CAD against the USD provided a welcome buffer to the equity market declines for Canadian investors with exposure to non-Canadian equity markets. Overall, the Canadian equity market was down 5.4% (S&P/TSX Composite Total Return), the U.S. equity market (S&P 500 in CAD) fell 6.5% and the non-North American developed equity market (MSCI EAFE in CAD) dipped 2.2%. For the year, only the U.S. equity market delivered a positive return for Canadian investors.
As the new year begins, the market is struggling to find data that is supportive of equity markets – two days into 2019 and news headlines all point to slowing global economic growth with Trump’s refusal to waver on his border wall and the related government shutdown not helping matters. While we expect turbulent days ahead, it is important to stay the course and remain focused on our long-term goals.
Sources: National Bank Financial Markets, Morningstar