The role of the financial industry as an allocator and distributor of capital to the economy is critical to the evolution of the current pandemic. The current health crisis has morphed into an economic crisis, which has morphed into a financial crisis. While advances in testing and contact tracing will help, risk of a second wave of infections and the re-imposition of strict containment measures is likely to remain until a vaccine is developed. Simultaneously, geopolitical risks are heating up amid escalating tensions over Hong Kong, civil unrest in the U.S. and the return of Brexit uncertainty. We are monitoring these developments and have maintained our previous Recession outlook for the U.S. economy to reflect a Recession that began in March and extends through the end of the year.

Central banks globally have taken action. The China National People’s Congress (NPC) has laid out plans for fiscal stimulus. Japan’s fiscal support measures turned out to be larger than initially planned, at 22% of GDP.1 The European Central Bank announced €750B in stimulus grants and loans to be funded by the currency area’s first joint debt.2 The 17.1% month over month collapse in eurozone industrial output in April was partly reversed in May and June, but the recovery will be much more gradual than the slump.3 In the U.K., GDP figures for April showed that output fell by a cumulative 25% since its pre-crisis peak in February.4

The FOMC minutes reinforced the Fed’s commitment, putting floors on risk markets. The Fed has moved to the outer limits of monetary intervention to backstop CMBS, investment grade bonds, the muni market, and high yield debt. The Fed’s balance sheet has expanded more in three months than it did cumulatively in the six-year period from December 2007 to November 2013.5 The U.S. international trade deficit widened to $49.4 billion in April as exports slumped.6 The closure of motor vehicle production plants throughout North America had the greatest impact on the slump. Retail sales plummeted in April, down 16.4%, a 21.6% year-over-year decline but began to recover in May (up 17.7%) as thousands of stores and restaurants reopened after lockdowns and federal stimulus checks and tax refunds fueled a burst of spending.7 The permanent devastating impact on the economy can be seen in retail bankruptcy filings, as retailers J.C. Penney, J. Crew, and Neiman Marcus declared bankruptcy, and Lord & Taylor plans to liquidate.8 Unemployment was 14.7% in April, followed by an improvement in May to 13.3% as 2.5 million jobs were added back to the nonfarm employment.9

Statistics Canada announced that the services trade balance jumped from a deficit of $1.1 billion in March to a surplus of $0.3bn in April, reflecting that more Canadians travel abroad than foreigners travel to Canada.10

Markets during May were driven by some positive data and reopening plans. The S&P 500 closed up 4.8% for the month. The S&P MidCap 400 gained 7.3% and S&P SmallCap 600 gained 4.3%. Canadian equities had a positive month, with the S&P/TSX Composite up 3.0%. S&P Europe 350 gained 2.9% as contributing nations unlocked at differing speeds with German equities providing the greatest positive contribution. Asian equities continued their recovery, with the S&P Pan Asia BMI up 3.0%. S&P China 500 gained 1.0%, S&P Korea BMI was up 4.8%, while S&P Hong Kong BMI dropped 7.8% in May.

In June, we maintained the asset allocation that was established in May for all portfolio models. We continue to be positioned in shorter duration fixed income. We expect interest rates to remain low or negative across the globe and as a result, we continue to have exposure to gold which is a store of value in this environment and a preferred asset for central banks for the foreseeable future. Equity exposure to large cap across all models reflects our view that shifting business models during this pandemic have had a negative impact on bottom lines but that select businesses are benefiting from the shift.

The scale of the economic damage caused by the coronavirus outbreak will lead to an extended period of weak economic growth, excess capacity, deflationary pressure, and a wave of bankruptcies. Financial repression is likely to remain through our outlook time horizon (the next twelve months) as central banks continue to demonstrate their willingness to keep widening their safety net. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame , President and CIO

 

1KPMG Insights, Japan. April 7th, 2020.

2European Central Bank. March 18th, 2020.

3Trading Economics, Eurozone Industrial Production. April 2020.

4Trading Economics, United Kingdom GDP Growth. May 13th, 2020.

5Trading Economics, U.S. Central Bank Balance Sheet. June 10th, 2020.

6Trading Economics, U.S. Balance of Trade. June 4th, 2020.

7Trading Economics, U.S. Retail Sales. June 16th, 2020.

8S&P Global Market Intelligence. May 15th, 2020.

9Trading Economics, U.S. Unemployment Rate. June 5th, 2020.

10Trading Economics, Canada Balance of Trade. June 4th, 2020.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 29, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The economic impact of the extraordinary measures taken by governments all around the world to flatten the COVID-19 pandemic curve is highly uncertain. The outcome will depend on the evolution of the virus and the intensity and efficacy of containment efforts. Economic data continue to show severe economic disruptions associated with COVID-19 and only limited signs of a recovery so far. The dichotomy between the supply and demand side is concerning as evidenced by the re-opening of some economies where consumers remain on the sidelines. Central banks are now operating at the limits of what they can do to support aggregate demand. Consequently, we are entering an era of more active fiscal policy. We are monitoring these developments and have maintained our previous Recession Outlook for the U.S. economy to reflect a Recession that began in March and extends through to the end of the year.

Emerging Market central banks are cutting rates aggressively, allowing their currencies to depreciate while supporting domestic demand. This is bearish for EM currencies and sovereign spreads in the near-term but will lead to stronger economic recovery down the road. In China, industrial production rebounded to a 3.9% annual growth rate in April while retail sales remained weak as they contracted at an annual 7.5%1.

In this crisis, the U.S. government is ramping up its deficit much faster and much more aggressively than it did in 2008. A corporate bond-buying program was announced by the Fed in March, as part of a package of pandemic rescue measures. The program, which is managed by BlackRock, will take $75 billion in equity from the Treasury and leverage it 10-to-1, giving it up to $750 billion to buy corporate bonds for the first time in its history, starting with bond ETFs2. On April 8, the Federal Reserve widened the credit ratings of corporate bonds it will buy to include recently downgraded corporate bonds that have a rating no lower than BB-, as well as ETFs that have exposure to eligible non-investment grade corporate bonds3.

The U.S. trade deficit widened in March as a decline in exports outweighed that in imports. The service sector declined, driven by the collapse in international tourism. The April ISM non-manufactur­ing index declined 10.7 points to 41.84. The jobs report showed that U.S. payrolls plunged by 20.5 million in April as the unemployment rate skyrocketed to 14.7%5. The consumption basket of U.S. households has shifted in a way not reflected in the CPI’s basket. People are buying more food from the grocery store, more gym equipment, etc. while not spending money in restaurants and hotels, suggesting that the basket faced by the consumer is experiencing greater inflation than what the BLS measures. In Canada, real manufacturing sales fell 8.3% in March, and Automotive News reported total auto production of zero units in the month of April6. Existing home sales fell by 57% in April7.

After March’s carnage, April offered a welcome rally. The S&P 500 gained 12.8%, the best monthly performance since January 1987. The S&P MidCap 400 was up 14.2% while the S&P SmallCap 600 gained 12.7%. In Canada, the S&P/TSX Composite gained 10.8%. The pandemic is only one of two shocks, the other being global energy prices. This weakness has also been apparent in the Canadian dollar. Northern European equities outperformed, while Southern Europe lagged as politicians squabbled over the form and magnitude of potential relief for the nations hit hardest by COVID-19. The S&P Europe 350 gained 6.1% on the month while the S&P United Kingdom gained 3.5%.  Asian equities began to recover in April, with the S&P Pan Asia BMI up 8.5% while the S&P China 500 gained 6.1%.

In May, we maintained the asset allocation between Equities and Fixed Income but adjusted our exposure within Fixed Income. We added Mortgage Backed Securities while removing Municipal Bonds, the 3-7 year Treasury was added to replace the 7-10 year Treasury, and the 20+ year Treasury was removed with the allocation going to Mortgage Backed Securities and Gold for the Growth and Aggressive Growth Models. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.

The market is reconciling a deep global recession of uncertain length, with a V-shaped recovery in financial markets supported by an extraordinary central bank back-stop. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame , President and CIO

 

Trading Economics, China Industrial Production and Retail Sales. April 2020.

The Federal Reserve. March 23rd, 2020.

The Federal Reserve. April 8th, 2020.

Trading Economics, U.S. ISM. May 5th, 2020.

Trading Economics, U.S. Unemployment Rate. April 2020.

Trading Economics, Canada Manufacturing Production. April 2020.

CREA Monthly Housing Statistics. May 2020.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. April 30, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The economic cost of the COVID-19 crisis may pale in comparison to the human cost. Many people fear for their own health and that of their loved ones. As such, there is a “real” element to the fear factor. Measures to contain the virus have upended supply chains and financial markets and have weighed on commodity prices. Consumer and business confidence are expected to remain subdued for some time, not least if fears of a second wave of the virus linger. We are monitoring these developments and have maintained our previous Recession outlook for the U.S. economy to reflect a Recession beginning in March and extending through the end of the year, as the situation will deteriorate further before beginning to recover.

With lockdowns in place across much of the world, the IMF has downgraded their forecasts further in recent days, now forecasting global real GDP to fall by over 3% this year. That compares with a pre-virus forecast assuming growth of about 3%. This means that 2020 is set to be the worst year for the global economy since the end of the Second World War, when world GDP in 1945 plunged by 5.5%.1

The Fed has launched many new programs. The U.S. was on track for an outright fiscal drag in 2020 due to expiring stimulus, living with the largest fiscal deficit and thus is the least capable of delivering more fiscal stimulus. The Federal Reserve has now expanded its balance sheet beyond $6 trillion, an increase of almost $2 trillion in less than a month.2 It has taken extraordinary steps to lift regulations to help banks play their part in the relief effort. One consequence may be that central bank support could help most risky assets to outperform safe ones by a wide margin as these measures go far beyond conventional monetary easing in their efforts to backstop the financial system. With a policy interest rate that has been cut to a range of 0% to 0.25% and commitment that rates would stay low indefinitely, the supply of funds outside of the Feds own money creation may become scarce. By virtue of a system that promotes superior productivity growth, the country’s knack for nurturing world-beating companies, and less challenging demographics than the developed world, there is some hope that the U.S. can outpace most of the developed world in economic recovery.

Canada will rack up debt faster in this crisis than any other developed country, relative to its economy, according to data from the IMF. It is fortunate that Canada’s governments went into this economic crisis in a much better financial position than most other developed countries. Net government debt (total government debt minus its cash holdings) was at 40% of economic output before the crisis. The average for developed countries was 107%. This may be why Canada’s governments have proven more willing to spend their way out of the crisis than some others.3

Global markets in Q1 were devastated by the coronavirus pandemic. U.S. equities posted their worst quarter since 2008, with the S&P 500 down 19.6%. The S&P MidCap 400 and the S&P SmallCap 600 were down 29.7% and 32.6%, respectively. Canadian equities were likewise battered, with the S&P/TSX Composite down 20.9% for the quarter. The Canadian Energy sector was down by 30.8% in March and 37.2% in the first quarter. The global pandemic fears also spread rapidly across Europe. Italy, and then Spain. The S&P Europe 350 fell 14.0% in March to complete a 22.4% drop this quarter, the worst monthly and quarterly performance since September 2002. International markets were not spared, and the S&P Pan Asia BMI was down by 20% for the quarter. U.S. Treasuries benefited from a flight to safety. Corporate bonds fared less well, as spreads widened across sectors and grades of the credit market.

In April, we maintained the asset allocation positioning that we established on February 19th. This reflects our view on deflationary and recessionary influences that dominate the global economy.  Allocation to equities was reduced in February to 12% in Tactical Conservative, 17% in Tactical Moderate Growth, 26% in Tactical Growth, and 34% in Tactical Aggressive Growth. In February, within the Fixed Income allocation, we added the 20+ year Treasury Bond. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class. Gold has played an important role in portfolios as a source of liquidity and collateral. As has been the case in previous market selloffs, we have seen that the stronger the pullback in the stock market, the more negatively correlated gold becomes.

This shutdown will cause the greatest short-term drop in output that the global economy has ever experienced, and the pace of the subsequent recovery is hard to determine at this time. No one knows how long the supply and demand disruptions will constrain growth. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

1 Capital Economics. Global Economics Update. March 31, 2020.

2 Capital Economics. U.S. Economic Update. April 16, 2020.

3 National Bank of Canada. Public Sector Debt. April 15, 2020.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

 

A global recession in 2020 is all but confirmed as nations shut down economic activity to limit the spread of COVID-19. The virus is unique in that it is a demand shock and supply shock, and also a negative wealth, oil price, and credit shock. There will be a wide range of subsequent effects. We are monitoring these developments and have updated our previous Stagnation followed by Recession outlook for the U.S. economy to reflect a Recession in March, extending through to the end of the year, as the situation will deteriorate further before beginning to recover.

There is evidence that the disease has likely peaked in China. The Bloomberg China Economic Recovery Index shows that 70% of economic activity was restored by March 9th, up from just 27% at the beginning of February.1 A coordinated global response has started to emerge. Based on the experience in China, virus incidents are unlikely to peak in Europe and the U.S. until June.

The Russia-Saudi spat that has resulted in the current global oil glut and the expected decline in demand due to this pandemic will keep oil prices low with mixed effect across economies. It will have a negative impact on oil-exporting emerging markets outside Asia, while also affecting oil-and-gas related capital expenditure in the U.S. Net oil importers in Europe and Asia will be beneficiaries although the stronger US dollar will offset a portion of the benefit.

In January, a record 31.8 million Americans were employed in retail trade, hotels and motels, air transportation, restaurants and other eating places, arts, entertainment and recreation, and offices of real estate agents & brokers.2 Many of these establishments have seen their businesses collapse in recent weeks and have reduced their payrolls significantly. As we enter the third week in March, 158 million Americans have been told to stay home from work and other activities.3 This doesn’t include the multiplier effects on other industries. Initial unemployment claims and the unemployment rate are soaring and will remain high through the second quarter.

Market behavior in recent weeks has broken records for the speed of its decline. It took only 16 trading sessions for the S&P 500 to fall 20% from its highs, the quickest descent into bear market territory on record.4 U.S. equities were battered in February, down 13% from their peak on February 19th. The S&P 500 was down 8.2%, while smaller caps lagged, with the S&P Midcap 400 and the S&P SmallCap 600 down 9.5% and 9.6%, respectively. The S&P/TSX Composite was down 5.9%.

Asian equities took part in the sell-off, with the S&P Pan Asia BMI closing the month with a decline of 6.6%. European equities struggled in the face of a broader global sell-off. The S&P Europe 350 dropped 8.6% on the month. U.K. equities continued to lag their European counterparts; the S&P United Kingdom declined 9.0% on the month, returning all of its gains from the past 12 months.

In March, we maintained the asset allocation positioning that we established on February 19th. This reflects our view on deflationary and recessionary influences that dominate the global economy.  Allocation to equities was reduced in February to 12% in Tactical Conservative, 17% in Tactical Moderate Growth, 26% in Tactical Growth, and 34% in Tactical Aggressive Growth. In February, within the Fixed Income allocation, we added the 20+ year Treasury Bond. As of March 25th, the 10- year treasury yield has declined by 1.577% since the start of the year, rewarding this position. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.

Historically, central bank stimulus is bullish for bullion. In the early days of the selloff, safe haven assets such as gold and treasuries sold off when margin calls on equities and credit occurred as equity portfolio managers were sitting with record-low cash buffers. Gold provides diversification in a portfolio and is correlated with the stock market, becoming inversely correlated during periods of stress. In a world of historically low interest rates, gold is a safe-haven. Similar short-term movement was seen in the ten-year note and in State and Local government bonds and Mortgaged Back Securities guaranteed by the federal government in response to liquidity funding requirements.

The shape of the recovery from the pandemic and for the global economy are highly correlated.  The second-order effects of schools closing, businesses closing due to staff absence, and a paralysis in consumer and corporate confidence will create challenges for commerce and credit markets. Policymakers will need to protect both supply and demand by providing ample liquidity to banks and corporations, in order to minimize the risk of default and job losses. The trend towards global populism and protectionism remains a risk to the recovery. We expect to see prolonged disinflation. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame , President and CIO

 

1Bloomberg. China Economic Recovery Index. March 9, 2020.

2Trading Economics, United States Employed Persons. January 2020.

3New York Times, World Coronavirus Updates. March 23, 2020.

4Financial Times. “S&P 500 suffers its quickest fall into bear market on record”. March 13, 2020.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2020. Index performance is based on total returns and expressed in the local currency of the index.

 

 

The coronavirus outbreak in China has generated economic waves that are disrupting global supply networks that act as the backbone of the global economy and comes as the global economy was already cooling off. Profit warnings from companies with significant operations in China and abroad have begun. We are monitoring these developments and have concluded that our Stagnation outlook for the U.S. economy will shift to Recession beginning in the back half of the twelve-month time horizon.

China is likely heading into a consumer recession, as auto sales there plunged 18% year over year in January to their lowest level in eight years.1 China accounts for 16% of global GDP on a US dollar basis, compared to 4% in 2003.2 In 2019, China accounted for 75% of total world oil demand.3 Commodities markets have tumbled as factories are idled. Iron ore demand is down more than 10% this year. Copper and nickel are down about 8%, while zinc and aluminum are both down more than 5% in 2020.4

In Japan, the world’s third-largest economy declined 1.6% in the fourth quarter of 2019 as the country absorbed the effects of a sales tax hike and a powerful typhoon. It was Japan’s largest contraction compared to the previous quarter since 2014.5

The U.K. and Germany managed to escape a technical recession while France and Italy contracted. Switzerland’s core CPI declined 0.5% sequentially in January. Italy, Germany, and France experienced a 2.7% decline in December industrial production. EU auto sales also declined 7.4% YoY in January.6 The UK’s future trade relationship with the EU remains unanswered. Brexit has already cost the UK economy between 2.5-3.0% of lost output.7 The final economic bill will depend on the extent to which EU trade is disrupted as the UK pursues greater autonomy over regulation, migration, and state aid.

In the U.S. the budget deficit to GDP ratio stands at 4.9%, up from 4.3% a year ago. The last time we saw this level was in May 2013 when the unemployment rate was 400 basis points higher than it is today at 7.5%.8 January nonfarm employment growth was 225,000 jobs. While the unemployment rate ticked up to 3.6%, this increase was driven by a jump in labor force participation.9 The coronavirus impact will be felt in the U.S., resulting in weaker exports, imports, and inventories. Canada’s economy has stalled as transportation activity has been disrupted by blockades set up by anti-pipeline protestors. Real manufacturing shipments fell 0.4% in December and real retail sales were flat. A recent rise in insolvencies comes amid a relatively robust job market.10

U.S. equities started the year strongly, but gains were erased towards the end of the month as a result of coronavirus fears. The S&P 500 was flat in January while the S&P MidCap 400 and the S&P SmallCap 600 were down 2.6% and 4.0%, respectively. Canadian equities were positive, with the S&P/TSX Composite up 1.7%. The S&P Europe 350 finished January with a loss of 1.3%, ending a four-month streak of gains. The S&P United Kingdom lagged its European counterparts in January, with the index declining 3.3% in pound sterling terms. U.S. fixed income performance was positive across the board, with treasuries and corporates leading the way. The decline in the U.S. long bond’s yield reflects a confluence of factors including easy Federal Reserve monetary policy, concerns about the COVID-19 epidemic’s impact on economic growth, and an absence of inflationary pressures. Gold is continuing its advance, after breaking out from a six-year base formation, rising as the US dollar rises, not the usual correlation.

In February, we reduced exposure to U.S. equities across all models and reintroduced the U.S. long-term Treasury Bond. This reflects our view on deflationary influences that dominate the global economy. Allocation to equities was reduced to 12% in Tactical Conservative, 17% in Tactical Moderate Growth, 26% in Tactical Growth, and 34% in Tactical Aggressive Growth. Within the Fixed Income allocation, we added the 20+ year Treasury Bond as long rates are expected to decline further. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.

The trend towards populism and protectionist policy remains a risk to the stability of global financial markets and the COVID-19 outbreak is likely to delay recovery and intensify disinflation. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame, President and CIO

 

Trading Economics, China Vehicle Sales. February 13, 2020.

Visual Capitalist. 70 Years of China Economic Growth. October 12, 2019.

Trading Economics, China Imports of Fuel Oil. February 2020.

Trading Economics, Commodity Prices. February 2020.

Trading Economics, Japan Q4 2019 GDP. February 2020.

Trading Economics, E.U. Economic Data. February 2020.

Oxford Economics. Brexit. February 2020.

Trading Economics, U.S. Debt to GDP. February 2020.

Trading Economics, U.S. Non-Farm Payrolls. February 2020.

10 Trading Economics, Canada Insolvencies. February 2020.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2020. Index performance is based on total returns and expressed in the local currency of the index.

Global growth is projected to reach 2.5% in 20201. Reduced trade uncertainty combined with last year’s easing in financial conditions helped business sentiment stabilize in many major economies. The U.S. dollar benefitted from safe-haven demand over the past year amid this trade uncertainty. Global manufacturing activity generally remains soft; the global manufacturing PMI fell to 50.1 in December, consistent with stagnation.2 Trade challenges between the world’s two largest economies are likely to continue, with no long-term deal to tackle structural issues and imbalances between the U.S. and China. Growth forecasts for advanced and developing economies have been revised down as a result of weaker than expected trade and manufacturing activity. We are monitoring these developments and have concluded that our Stagnation outlook for the U.S. economy over our forecast time horizon of twelve months still stands, with a recession likely in 2021.

GDP growth in China has slowed to 6% in the third quarter of 2019, its slowest pace in about 30 years.3 Policymakers are focused on measures to limit risks arising from excessive debt burdens, even if it means weaker rates of growth. An uptick in infrastructure projects towards the end of last year has been the main driver of growth. Eurozone growth continues to underperform, dampened by the gradual slowdown in China, the ongoing Brexit saga, White House protectionism, and the threat of more tariffs. The accommodative policy measures implemented by the ECB and fiscal policy should continue to prop up the economy. Concern grows about the corrosive side effects of negative interest rates as the ECB’s bond-buying program nears its self-imposed limits.

The U.S. leads the global charge as their economy is entering its eleventh year of expansion, the longest on record. The consumer remains the main source of strength due to strong job gains and low interest rates that have bolstered spending. While the U.S. has proven successful in securing a trade deal with Canada and Mexico and extracting a “phase one” trade agreement with China, vulnerabilities remain due to their sizeable trade deficit. As a share of GDP, the U.S.’s goods trade deficit over the last two years has narrowed only marginally below the last decade average, driven mainly by a slight reduction in U.S. import demand, where lower merchandise imports from China have been replaced by imports from Mexico, Europe, and developing countries in Asia.4 The PMI for the sector hit its lowest level in a decade in December.5 Conflicts in Iraq and Afghanistan have left the American public strongly opposed to further major conflicts in the Middle East and a direct conflict with Iran would raise downside risks to business activity. For Canada, healthy demand stateside and receding North American (USMCA) trade tensions helped facilitate the much-needed rotation towards exports and business investment from the consumer and housing sector in the fourth quarter.

One of the most notable effects of last year’s Fed rate cuts was support for asset prices. U.S. equities ended 2019 strongly with the S&P 500 up 31.5% for the year, despite lackluster profits, slowing global growth, and recession fears. It is worth noting that a late-2018 selloff provided a flattering comparison for 2019. Mega-caps dominated as gains for the S&P MidCap 400 and the S&P SmallCap 600 were 26.2% and 22.8% for the year, and 2.8% and 3.0% for December, respectively, while the S&P 500 was up 3.0% for the month. U.S. fixed income performance was positive across the board. The S&P/TSX Composite gained 22.9% during 2019 and was up 0.5% in December, closing out the decade with its best annual performance since 2009. European equities also experienced their best year since 2009 with S&P Europe 350 up 27.2% for the year and 2.1% for December. The S&P United Kingdom finished 2019 up 17.2% for the year. Commodities also rallied, with the DJCI up 10.1% and the S&P GSCI up 17.6% for the year, driven by gains in Energy and Precious Metals.

In January we maintained the December allocation between Equities and Fixed Income across all models. Allocation to equities remains at 17% in Tactical Conservative, 22% in Tactical Moderate Growth, 36% in Tactical Growth, and 44% in Tactical Aggressive Growth. Within the Fixed Income allocation, we maintained the weight of the 7-10-year maturity in order to protect the portfolio from a rebound in long rates. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class.

The trend towards populism and protectionist policy remains a risk to the stability of global financial markets while heightened geopolitical strains also have the potential to create volatility. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

 

Deborah Frame , President and CIO

 

The World Bank Group. Flagship Report. Global Economic Prospects. January 2020.

2 J.P. Morgan Global Manufacturing PMI. News Release. January 2, 2020

Trading Economics. China GDP. January 20, 2020.

Trading Economics. U.S. Goods Trade Deficit. November 26, 2019.

Trading Economics. U.S. PMI. January 2020.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2019. Index performance is based on total returns and expressed in the local currency of the index.