June 03, 2019 – KERR MARKET SUMMARY
Following one of the greatest financial market rebounds to start the year in a long while, an escalation in Sino-U.S. trade tensions rattled risk assets in May. This culminated on the month’s final day with President Trump’s unexpected tariff threat on Mexico, which sent equity prices and bond yields tumbling. Though there are no winners in a trade war, we believe it would require a major escalation in protectionism, protracting beyond just North America and China, to produce meaningful damage to the global economy. Furthermore, much like his earlier vow to close the Southern border, Trump’s latest threats could ultimately come to naught.
On the economic front, market pundits anticipate that the direct effect of recent tariff threats to global GDP would be small, as a degree of export substitution would occur with other countries. However, the impact on business confidence and investor sentiment could be consequential, potentially increasing demand for renewed policy loosening. Moreover, it is important to note that tensions between Trump and China have never solely been about trade. The world’s two largest economies are in a competition for access to technology, intellectual property, advancement – and ultimately global dominance. A deal therefore appears elusive in the short-term, and volatility is expected to remain elevated for the foreseeable future. We believe the rise of China as a challenge to U.S. hegemony is the most significant geopolitical event of the 21st century. How this plays out will keep evolving over the next decade.
In fixed income news, the Bank of Canada and U.S. Fed left interest rates unchanged last month, as deteriorating trade relations triggered a flight to quality accompanied by an atrophy in bond yields. Bond investors wrestled with the potential impact of a trade war on the global economy and monetary policy. This uncertainty fostered a risk-off tone that continued spurring demand for safe haven assets. Central banks appear ready to provide aid so long as inflation remains lower than desired. The Canadian bond market returned 1.7% in May. Long bonds outperformed their short-term counterparts, each market advancing 3.4% and 0.5%, respectively.
Equities around the globe came under pressure last month, with fears of a protracted Sino-U.S. trade war and softer global economic data weighing on investor appetite. While we do not believe the rally in stock prices is over for the cycle, an extended period of market churning would come as no surprise. The rationale for continued equity market expansion hinges on the catalysts of trade policy, central bank accommodation, economic growth, and corporate earnings. Until then, markets remain vulnerable. Last month the Canadian and U.S. stock markets returned -3.1% and -5.9%, respectively. International and emerging stock markets posted returns of -4.2% and -6.8%. All four major markets remain in positive territory year-to-date, up anywhere from 3.1% (EMs) to 13.4% (Canada).
As investors, the question we continue to face is where will markets go from here amid the clouds on the horizon. We remain constructive on long-term prospects for equities, favouring them over fixed income and cash at this point, as we believe the penalty for prematurely exiting risk assets is still too high. When the timing and probability of future outcomes appear this uncertain, refocusing on the controllable can be a helpful grounding mechanism. Rather than trying to forecast what lies ahead, which history reveals is seldom successful over time, we are confident that the best approach is to continue building a decision-making environment that helps us avoid mistakes and minimize risk. We remain focused on investing in the right asset mix for each client to achieve their long-term goals, as well as selecting the optimal strategies and solutions within each asset class. Helping our clients stay tethered to the core tenets of their investment policies is also a critical component of dedicating ourselves to their long-term success.
Sources: National Bank Financial Markets, Capital Economics, Globe Investor, Morningstar Direct