Summer 2019 market outlook: Markets continue to ride high and the global economy remains in focus

July 23, 2019

Key takeaways:

  • Markets advanced through the second quarter of 2019, following the strong rebound in the first quarter.
  • Stock markets are at, or near, record highs. We expect corporate earnings to slow, but remain optimistic on equities.
  • Central banks are adopting a “dovish" stance on monetary policy—would have a stabilizing effect in anticipated global economic slowdown.

Global markets continued to advance through the second quarter of 2019, with major stock exchanges at, or near, record highs, led by U.S. equities.

At the same time, the pace of global economic growth continued to underperform relative to expectations, with slowing business activity and weaknesses spreading beyond China and the Eurozone.

Central banks pivot on policy to stave off recession risk

Many central banks around the world, including the U.S. Federal Reserve, shifted towards a more “dovish" tone on monetary policy in the second quarter, with many indicating a pause or cut in interest rates to offset recession risks.

The U.S. economy remained strong, although slowed from its rapid pace of 2017 and 2018. Employment and U.S. gross domestic product data were solid in the second quarter, however other measures appeared mixed, with weakening consumer and business confidence, and slowing business activity.

Economies attempt damage control over trade conflicts

Trade conflicts with the U.S. fuelled greater uncertainty for the Chinese economy and its globally connected industries in the second quarter, offsetting efforts of policy makers to engineer a “soft" landing since China's targeted deleveraging in 2018.

Trade challenges also hampered growth in other developed and emerging markets economies. In the Eurozone, a manufacturing slowdown was fairly sharp, particularly in Germany.

Seeing stabilizing effects on stock markets into 2020

Investor fears of recession may be shaped by “soft" sentiments and concerns about geopolitical risks, more than hard economic data. Current conditions continue to support equities and we believe that the risk of recession remains relatively low. We expect corporate earnings to slow, but remain optimistic.

Our outlook is consistent with previous market updates: despite slowing growth, we anticipate the global economy to remain positive and stabilize through the end of this year. This would create a encouraging backdrop for stock markets well into 2020.

We will continue to monitor the U.S.-China rift and the potential for U.S.-Europe trade conflicts. Any positive resolution on either of these fronts would provide further stability.

A steady course for our portfolios and performance

We made only minor adjustments to portfolios during the second quarter of 2019. We reduced our allocation to equites modestly, yet remain overweight. We remain overweight U.S. equities, however reduced this position slightly. We reduced positions in Germany and Japan.

Performance of bonds over the past quarter continued to provide diversification, with market conditions leading to some of the strongest bond returns we have seen in recent years.

Commodity prices were slightly weaker during the quarter led by a small decline in oil prices.

The Canadian dollar strengthened over the quarter due to a run up in June, as incoming inflation data provides less impetus for the Bank of Canada to cut rates than other central banks.

Conditions in the global economy are evolving as we expected, including many of the same uncertainties around trade. We will continue to adjust our strategy when appropriate and supported by reliable data.

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

 

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

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