What are markets telling us about the global economy?
You may notice that all the numbers in the table below are green – in positive territory over all time periods. The 4.7% drop in the Canadian Dollar versus the U.S. dollar has also provided a significant boost to portfolios that are globally diversified and report in Canadian currency. The year-to-date actual returns in local currencies for the S&P 500 is a mere 1.87% and index for EAFA is actually down 7.49% for the EAFA (Europe, Australasia and the Far East).
|June ’18||YTD||1 Year||3 year||5 year||10 year|
|S&P/TSX Composite||+ 1.35%||+ 0.42%||+ 7.22%||+ 3.80%/yr.||+ 6.06%/yr.||+ 1.19%/yr.|
|S&P 500 (C$)||+ 1.95%||+ 6.69%||+ 13.50%||+ 11.53%/yr.||+ 16.14%/yr.||+ 10.61%/yr.|
|S&P 500 (U$)||+ 0.48%||+ 1.67%||+ 12.17%||+ 9.63%/yr.||+ 11.10%/yr.||+ 7.82%/yr.|
|MSCI EAFE (C$)||+ 0.05%||+ 0.22%||+ 5.24%||+ 3.83%/yr.||+ 8.34%/yr.||+ 2.54%/yr.|
* Source: Equity Index and Currency Data: Bloomberg. Data as of June 29, 2018
Looking back at the first half of 2018
While first quarter earnings were generally strong, markets are now viewing those in the rear-view mirror. While major economies such as the U.S., eurozone and Japan are still experiencing economic growth, the rate of growth has decelerated.
Protectionist measures and counter-measures taking the form of tariffs are increasing Input costs. Steel and aluminum tariffs are driving up costs along with significant increases in oil prices. The tight labour force conditions in the U.S. are having labour cost increases as well. Rising costs often result in a narrowing profit margin which in turn can reduce corporate earnings.
Geopolitical uncertainty abounds. The fluctuating tensions between, North and South Korea, the fragile coalition government in Germany, the difficulty the UK has had in orchestrating its exit from the European Union and the new government in Italy has the potential to disrupt not only the situation in Italy but the European Union. However, The outcome of the recent election in Mexico is thought to be a stabilizing influence for their country and in their negotiations in NAFTA.
Outlook for the second half of the year
The global economy is expected to accelerate in second half of 2018. The U.S. is showing signs of reacceleration and other major economies are expected to follow suit. The European Commission’s Economic Sentiment Indicator indicates strong gross domestic product growth. Unemployment is continuing to fall in the Eurozone, although there are significant differences by country. The International Monetary Fund (MF) expects global growth of 3.9% for both 2018 and 2019. Economic growth and supportive monetary policy are powerful forces to help stocks end in positive territory for the year.
A significant proliferation in the trade wars could change my moderately positive outlook. I do believe that maintaining one’s equity exposure will be rewarded and is necessary to achieve one’s long tern return goals. Risk and volatility are best managed through portfolio diversification, including (where appropriate) exposure to select alternative investment products and strategies. We encourage a future discussion with Mailey Rogers Group about growing your exposure to alternative investments such as real estate, infrastructure, and certain hedge funds. These assets tend to have low correlations with traditional (long only) equity and bond market returns – thereby reducing overall volatility and adding new sources of returns in your portfolios.
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Senior Wealth Advisor
Director, Wealth Management
Mailey Rogers Group