A spectacular rebound, but reaching new stock market highs won’t be easy
Author: Kevin McCreadie
January 23, 2019
Investors are right to feel whipsawed. Late December was ugly, followed by one of the best January market openings in decades as the S&P 500 Index rebounded, helping claw back half of what was lost since its September peak.
All of this volatility, combined with trade tensions, Brexit, and the recent government shutdown in the United States, is continuing to fuel anxiety as investors grapple with the most pressing question of all: Will we see a recession in 2019?
There’s little doubt data is weakening and economies are slowing around the world. But we still believe a recession in the U.S. is unlikely over the next twelve months and that equity markets are poised to rise from here. But getting back to that September high is going to be a grind.
The seeds of market discontent
So, how did we get to that late-December sell-off? Two events last fall paved the way for the downdraft and recent market volatility. First, there was the misguided quote from the U.S. Federal Reserve (Fed) chairman Jerome Powell about rates being “a long way from neutral,” which caught the market by surprise and fuelled fears that a number of further interest-rate hikes could spark a recession. Then came the sabre-rattling around China and tariffs just days later when U.S. Vice-President Mike Pence addressed Washington’s Hudson Institute, an event interpreted by many as a declaration of economic war between the two countries.
Tempering rate and trade fears
Come January, and these concerns are easing. The recent rally in global markets roughly coincided with the Fed announcing it would take its cues from economic data and dampened market worries that the central bank would take an overly-aggressive stance on interest rates and the normalization of the Fed’s balance sheet. Markets have been further buoyed by the news that U.S. and Chinese officials have resumed talks aimed at resolving the trade dispute.
However, the U.S. government shutdown has already delayed important economic data making it more difficult to take the pulse of the U.S. economy. Some estimates posit that the shutdown could shave 50 basis points off growth each month it continues.
Still, we believe the groundwork is set for markets to recoup remaining losses following the sell-off and we’ll grind our way higher. Ultimately, it’s going to come down to fundamentals–especially profit growth. And the market will be forced to give even greater weight to corporate earnings given the paucity of other economic data in the near term.
Globally, a mixed picture with storm clouds gathering
Emerging markets have been outperforming world markets since the fourth quarter and we’re optimistic they could continue into 2019. However, the outlook is gloomier when we look to Europe. In fact, if there are worries about a recession showing up in late 2019, we believe it will probably be in Europe where Germany—which has lead the Eurozone—is witnessing a slowdown. Meanwhile, even though the immediate threat of a hard Brexit, in which the United Kingdom would withdraw from the European Union without a deal in place has been stalled given last week’s dramatic vote in the U.K. Parliament, worries over the fallout from Brexit will continue to cast a pall on all of Europe until there is clarity.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
Commentaries contained herein are provided as a general source of information based on information available as of January 22, 2019 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
Publication date: January 23, 2019.
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Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
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Written by
Kevin McCreadie, MBA, CFA®
CEO and Chief Investment Officer
AGF Management Ltd.
