Global Markets Gain
Investors in Canada and beyond are wealthier today than they were a year ago. Several global markets rose by double digits, including Canada’s S&P/TSX Composite Index, which climbed by 22.8% (total return), America’s S&P 500, which increased by 25.2% ($CAD total return), Britain’s FTSE 100, which rose by 16.2% ($CAD total return, with most of those gains coming after the country’s December election) and the FTSE Australia Index, which jumped by 17.2% ($CAD total return). The MSCI All-Country World Index (ACWI), an index that tracks the performance of stocks from around the globe, was also up by 21.3% ($CAD total return), and while the MSCI Emerging Markets Index struggled for most of 2019, it saw a big rebound in December returning 13.1% ($CAD total return) for the year.
There are several key reasons that so many markets reached record breaking highs in 2019.
First, the market performed so poorly in the last two months of 2018 – the MSCI ACWI was down 11.1% ($CAD total return) between October 1 and December 24 of 2018 – that it was simply rebounding at the start of 2019. Indeed, between January 1 and May 1, 2019, the markets experienced most of their gains. Since May 1, 2019, Canada’s market climbed by just 5.6% (total return), while U.S. stocks rose by 8.3% ($CAD total return).
The second key reason relates to the more dovish attitude from the U.S. Federal Reserve. In 2019, the Fed cut its overnight lending rates three times – it started the year at 2.5% and ended at 1.75% – in part to stimulate U.S. economic growth. Typically, when rates decline stocks rise as it becomes easier to make money in equities than in low-yielding bonds.
It also helped that earnings growth, while slower than 2018, was not as slow as many people had feared. A December “phase one” trade agreement between the U.S.-China put a pause on additional tariffs and, as a result, removed some of the uncertainty that weighed on emerging market (among other) stocks.
In terms of investment styles, growth stocks – mostly high-flying technology companies – outperformed value stocks – blue chip stocks like telecoms and grocery stores – for most of the year. However, with growth stocks becoming more expensive over the last 12 months, investors began buying more value companies in September and October. If global growth slows and recession fears increase, then value stocks, which usually fall less in a downturn than growth companies, should continue doing well.
Canada Up, but Lags Peers
As well as Canada did in 2019, it still unperformed many developed markets. Why? Due to, as is often the case, oil prices and other energy sector issues. While the price of West Texas Intermediate (WTI) crude did climb by about 34% over the last 12 months, from $45 USD per barrel of oil to $61, it fell by 7.5% from April, when prices hit $66 USD a barrel. As well, a lack of pipeline capacity continues to hamper Canadian companies – they’re having trouble exporting crude to the U.S., causing a backup of supply. Oilsands investment – from retail and institutional investors – has also fallen, as some are turning their attention to renewable energy, while others think the lack of new pipelines signals a lack of energy sector support from the Canadian government.
It also didn’t help that the cannabis sector cratered over the last year. While the industry isn’t nearly as large as energy or financials, the massive gains these companies experienced prior to legalization in October 2018, did help push the country’s overall market higher. With an oversupply of product and continued strong black-market demand, it’s been difficult for cannabis companies to make money. Many of the sector’s largest companies saw share prices decline by between 15% and 50% in 2019.
Nervousness around Canada’s economic growth, especially in the latter half of the year, persisted. While the economy saw strong job gains for most of the year, in November, about 71,000 people lost their jobs, the most since the recession, though it did recoup some of those losses in December, with a 35,000 gain in employment. The Canadian economy also expanded by just 1.3% annualized in the third quarter, far slower than the 3.5% growth it experienced in the second quarter.
Still, with a near 20% gain, it was a great year on the whole for domestic investors, with more interest rate sensitive stocks, such as utilities and real estate, leading the pack. (These sectors tend do well when bond yields fall as their yields become more attractive compared to now lower bond yields)
Is a Recession Ahead?
A potential recession was one of the biggest concerns for investors and experts in 2019. It’s been more than a decade now since the last one and many people feel we’re due for another. With corporate earnings slowing, in large part due to the U.S.-China trade war, negative growth in U.S. manufacturing and a yield curve inversion – when long bond yields fall below short-term bond yields, as they did this year, it can be a sign that a recession is coming – recession expectations were high.
Yet, growth continues. While the trade war isn’t going away anytime soon, in the fall, President Donald Trump did ease off on increasing certain tariffs. Bond yields have stopped inverting, while the U.S. economy is still expanding, albeit by about 2% in the third quarter, in part due to the Federal Reserve’s interest rate reductions. Although recession fears persist, at this moment, there’s no imminent sign the record long bull market is about to end.
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