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Sharon Kubicek
Alisa Carli
Christine Duggan

1 First Canadian Place
40th Floor , P.O. Box 150
Toronto, ON
M5X 1H3


January 2019

2018 Year End Review

The Year that No Investment Strategy Worked!!



It is a rare occasion for both stocks and bonds to post negative returns in the same year.   This was 2018! – the first year since 1971 when both stocks and bonds slumped, making  for a challenging year for  most portfolios regardless of their balance, sector or country allocation.

All major market indices were in the red in 2018.  China and Emerging Markets generally led the pack, with major European and UK markets down between 10-20%.  In Canada, the S&PTSX was down 11.6% with Financials and Energy driving  the weakness.  Surprisingly, REITS delivered stellar returns, despite rising rates.  Helped by Healthcare,   performance in the US was substantially  better, however,  the S&P500 was also down 6.2%.   Financials and Energy were joined by Industrials in sending US markets into negative territory, not to mention the FAANG stocks that best represented  the late-year selloff.

Comme d’habitude, Canadian oil prices made headlines throughout the year.   While WCS (Western Canadian Select) prices surged to $40U as the year ended, fueled by the Alberta Government’s mandated production cuts, it was only a few weeks earlier that WCS was trading in the teens.   The unprecedented differential between WCS and the US WTI (West Texas International)  demonstrated the problems faced by Western Canadian producers in getting their product to market in the face of limited pipeline capacity.

The root cause of the market’s volatility last year was no doubt the prospect for slower growth, both globally and in the US, in 2019.  Markets nonetheless overshot by a wide margin the mild cooling that is being called for the coming year.  Other factors that contributed to investor uncertainty included the US/China trade confrontation, steady Federal Reserve tightening, Brexit, a variety of geopolitical hotspots, and now the US government shutdown over funding of the “Wall”.

On the other hand, Doug Porter, Chief Economist, BMO Capital Markets, pointed out that 2018 produced a number of significant positives on the economic  front.  Global growth had another above-average year, jobless rates fell to multi-decade lows across much of the industrialized world, and the inflation ghost of cycles past again failed to materialize.  On balance, he believes the much of the current negativity in financial markets is overdone, and is quite simply exaggerating the downside.  As a partial antidote to market weakness, with inflation pressures cooling  off, and chilled further by the slide in oil prices, central banks have the flexibility to stop their rate-hike campaigns if financial markets weaken further and/or if growth slows more than expected.

Economic Research forecasts that US growth will come in at roughly 2%, down from 3.1% in 2018.  This will be sufficient to reduce the jobless rate a bit further with slightly more upward pressure on wages and core prices.   Any forecast is of necessity predicated on a political backdrop that includes the uncertain outlook for trade, as well as government funding  and fiscal policy in general.

In Canada, Economics is looking for a further cooling in GDP to just 1.8% this year, with risks leaning to the downside.  The two big engines of growth in this country, namely housing and consumer spending, are slowing, leaving the economy heavily dependent on exports, business investment and infrastructure spending for the coming year.

The Canadian Dollar suffered from the combination of lower commodity prices and global growth fears, ending 2018 just over 73 cents ($1.365U), down 7.8% for the year.  The loonie started 2019 on a better note, however, recovering to 74.6 cents, supported by a comeback in oil and a broader retreat in the US Dollar.

On the Central Bank front, subject to the Fed’s concerns that “global economic and financial developments” do not escalate and US markets’ recession fears subside, Economics expects two Fed rate hikes in 2019, namely June and December.  In Canada, the Bank of Canada believes that “interest rates will need to rise over time into a neutral range to achieve the inflation target”.  Economics continues to expect two rate hikes this year in July and December, but caution that slower growth would cause the Bank of Canada to join the Fed on the sidelines for the year.

After what he describes as a humbling year, Brian Belski, Chief Investment Strategist, BMO Capital Markets, headlined his 2019 prognostications for Canada as “Time to Control-Alt-Delete on 2018”!   Barring a global recession, he believes there is a good chance that Canadian stocks are already priced for a significant economic and earnings deceleration.  As such he is tweaking his 2019 price target for the S&PTSX to 17000.  Additionally, he believes that projection provides Canadian stocks with an opportunity to under promise and over deliver, especially considering the relative earnings growth and valuation proposition that the TSX represents.

Brian’s US strategy headline reads “Turning the Page on a Year and Quarter to Forget”!  Heis adjusting his 2019 year-end price target to 3000 to reflect the weakness in prices displayed in 4Q 2018.  He highlights that volatility has made a comeback, that markets can rebound from significant monthly losses and volatility spikes, that markets can also bounce back following down years, that valuation contraction has been a silver lining, and that down years don’t necessarily kill secular bull markets.

Do not hesitate to give either of us a call at 416 359-7565 or 416-359-7564 or email Sharon Kubicek or Alisa Carli if you have any questions respecting your portfolio and the prevailing investment, economic and political issues at play today.

Sharon and Alisa

BMO Capital Markets “Focus” December 21, 2018, January 4, 2019
Economic Research “Global Equity Weekly” December 21, 2018
BMO Capital Markets “Rates Scenario” January 10, 2019
BMO Financial Group “AM Charts” December 21, 2018
BMO Capital Markets “Canadian Strategy Snapshot” January 8, 2019
BMO Capital Markets “US Strategy Snapshot” January 2, 2019
The Globe and Mail “Globe Investor” Ian McGugan January 3, 2019