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Spring 2019 market outlook: Stock market rebound puts the focus back on the global economy

Key takeaways:

  • Markets rally to kick off 2019. Equity markets have mostly recouped late 2018 losses. Fixed-income returns have been robust.
  • We remain optimistic in our market expectations. While global growth continues to slow, it remains positive and above potential, led by the U.S.
  • A neutral U.S. Federal Reserve is supportive, and early signs of Chinese stabilization are encouraging.

Global stock markets made an upbeat rebound in the first quarter of 2019 and regained most of the ground that was lost in a disappointing fourth quarter 2018.

The MSCI All Country World Index ended the quarter up more than 16% from its lows at the end of last year. North American markets have recovered nearly to their highs, and the U.S. economy remains strong, despite easing from the steep growth we saw in 2017 and 2018.

This reaffirms what we said in our 2019 outlook: that, despite This reaffirms what we said in our 2019 outlook: despite slowing  global economic growth, we anticipate that it will remain positive and further stabilize through the last half of this year.  and to further stabilize through the last half of this year. This should provide a supportive backdrop for equity markets into 2020.

Markets make up for Q4 overreaction

As we stated at the time, the dramatic decline in stock markets in Q4 of 2018 was, in our view, an overreaction to the pace of monetary policy tightening by the U.S. Federal Reserve, amid worries about China and Europe.

That sentiment changed once the U.S. central bank softened its stance and announced it was putting future interest rate hikes on hold until global economic conditions stabilize.

Unfortunately, this move took place a bit late for stocks—only after the 2018 selloff. If anything, this illustrates the value of sticking to a long-term investment plan.

If China’s economy shows stability, so follows the world

The recent global economic slowdown has been largely driven by weakness in China and Europe, and this year we are looking for signs of improvement in both.

We expect both economies to stabilize and rebound, particularly China’s. Policymakers in that country took measures in 2018 to engineer a soft landing to a rapid slowdown.

Early data suggest the Chinese business cycle may already be springing back. The global purchasing managers’ index (a measure of economic health and a leading indicator of growth or decline) in March reported an uptick in manufacturing and an expansion in export orders—good measures of the state of the Chinese economy.

This helped raise sentiment as well as the stock performance of U.S. companies that have large revenue exposures to China. An improving Chinese economy could also help stabilize the eurozone, which largely underperformed expectations in 2018.

Good news travels across asset classes—and MD portfolios

It was an uplifting quarter for equity investors. The strong results of the first quarter were experienced across MD portfolios, funds and pools—and those with a greater allocation to equities saw a higher return.

In addition to the rebound in stocks in the first quarter, bonds also posted some of their strongest returns in recent years, reasserting their role in a balanced portfolio. Commodity prices also strengthened amid tighter supply in global production.

Our market expectations remain good

While concerns about global growth have eased, we are still taking measure of ongoing uncertainties in the global economy: Brexit, the U.S.-China trade dispute and other geopolitical risks. Signs of resolution on any of these fronts could provide further stability to the markets.

We believe current conditions support equities and that the risk of recession is relatively low for the next 12 months. At this time, we remain tactically overweight equities vs. fixed income. From a geographic perspective, we are overweight U.S. equities, slightly overweight Canadian and international equities, and slightly underweight emerging-market equities.

As always, we will continue to monitor global conditions and make suitable adjustments to our strategy when appropriate.

For more information about current market events, your portfolio or how your investments are positioned to perform through changing market conditions, please contact your MD Advisor.