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Fall 2019 market outlook: Slowing economies should steady, unless trade wars interfere

Key takeaways:

• Global stock markets stalled in the third quarter, yet remain near or at record highs, year-to-date.

• Bonds prices rallied in response to lowering interest rates, leading to strongest bond returns seen in recent years.

• As the current business cycle wanes, balanced conditions suggest global economy could avoid a sharp downturn.

We see the global economy approaching an important inflection point following the third quarter of 2019, but current conditions are right to avoid a sharp downturn going into 2020.

As we approach the end of the business cycle, expectations for future growth are lower. Yet there are few signs of economic imbalance that typically lead to recessionary conditions. Inflation is low and most indicators suggest financial conditions are still accommodative, with room for support by central banks' monetary and fiscal policy, worldwide.

Key risks hinge on geopolitical concerns like Brexit, U.S.–China trade talks and the brewing potential for a U.S.–Europe trade conflict—any bit of good news on those fronts would promote stability and fuel optimism.

Pace of growth slows globally, as Europe pumps the brakes

Global stock markets held in check for the third quarter of 2019, after a record pace set through the first half of 2019. The MSCI All Country World Index stayed essentially unchanged for the quarter, yet it remained up over 15% since the beginning of the year.

Although the slowdown was broad based, markets in North America outperformed those in international developed and emerging markets in the quarter.

Central banks look more "dovish" to ramp up stability

We're seeing a more coordinated response to a slowing business cycle, as central banks around the world ease monetary policies to kick-start economies.

Inflation continues to be tame, under 2% in almost all developed markets, leaving policy makers room to maneuver.

China's recent attempts to nudge growth is expected to provide some support which, in turn, may benefit the Eurozone and emerging market economies.

At the European Central Bank, former International Monetary Fund head Christian Largarde is set to take over from Mario Draghi at the end of October, on the heels of a stimulus package that drew ire from U.S. President Donald Trump. However, Lagarde's view has been to keep monetary policy highly accommodative for the "foreseeable future."

Once again, the U.S. steals the headlines

A global manufacturing slowdown is starting to have a more visible impact on the U.S. economy, and may start to affect hiring plans. Global concerns are the primary motive behind the U.S. Federal Reserve's latest cut in interest rates to sustain economic activity.

The impact of this rate cut may not be felt for some time, perhaps into 2020.

Additionally, the ongoing trade dispute is expected to offset some of these measures, amid growing perception of the Trump administration trade policy as the dominant risk to the economy.

Loonie rides high and bonds do their job

The Canadian dollar weakened over the third quarter but remained the strongest G-10 currency year-to-date. Earnings momentum in Canada has outpaced the U.S. and other developed markets over the last nine months, and our economy is still signaling growth.

One notable development, year-to-date, is how well bonds have performed. This asset class has done its job as a diversifier, leading to some of the strongest bond returns we have seen in recent years

We are taking a more cautious stance towards equity markets, given the slowdown and a slight increase in the probability of recession. However, our base case remains that the global economy will avoid a sharp downturn entering into next year. Stabilization in the fourth quarter would create a positive backdrop for global stock markets heading into 2020.

To learn more about the impact of these global economic trends on investments and the performance of your own diversified portfolio, I encourage you to talk to your MD Advisor*.

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