Outlook on 2020 and a recap of 2019 capital markets, global growth and geopolitics.
Welcome to a new year and a new decade!
As we close the book on the 2010’s and head into the roaring 20’s, I wanted to share some insights on 2019 and the year ahead. Last year was a big one for investors across the board, whether in equities or bonds. Capital markets soared over 20% in Canada and over 30% in the US. Interest rates, and therefore all traditional fixed income, started with a massive rally, ending the year in flat to declining rates. Here is a summary of 2019’s key market developments and some insight into the factors that may affect markets in the coming months.
Overall, global capital markets exhibited remarkable resilience in 2019, rebounding from a severe decline that occurred in late 2018. Despite starting the year on a tentative note, they ultimately shrugged off a stream of negative headlines and uneasy sentiment to stage a robust recovery, with the fourth quarter capping off a year of broad-based gains across most equity and income asset classes.
Supported by low interest rates, slow global economic progress and healthy corporate fundamentals, global equity markets advanced in the fourth quarter and registered solid results for 2019, with many finishing the year just off their all-time highs. The MSCI World Index rose 6.5% in Canadian dollar terms during the last three months of 2019, bringing its gain for the year to 21.9%. And despite ongoing trade uncertainty with China and the politically charged impeachment drama, the US S&P 500 up 9.8% for the quarter and finished 2019 with an increase of 30.5%.
Canadian equities also advanced in 2019, with supportive business conditions and strong commodity prices boosting results for most sectors. The benchmark S&P/TSX Index climbed 3.7% in the fourth quarter, capping off an impressive 22.9% gain for the year. Overseas, markets showed a similar trajectory, with European developed market equities advancing amid an environment of easy monetary policy and Brexit uncertainty, and many markets in Asia posting positive results for the fourth quarter and the year as well.
After moving to raise interest rates to a more “neutral” level from their record lows in 2018, the U.S. Federal Reserve reacted to weaker global economic growth and tepid inflation in 2019 by easing monetary policy. The central bank made three 25 basis-point cuts to its target rate through the course of the year, while many other international peers also lowered rates based on global economic concerns.
The Bank of Canada, however, charted a divergent course, keeping its policy interest rate steady at 1.75% throughout the year, making our interest rate one of the highest among developed countries. Last quarter 2019 saw 10-year U.S. and Canada government bond yields drifting higher, away from the inverted yield curve which made an appearance early last year.
The FTSE TMX Universe Bond Index, which broadly reflects results for the Canadian Government and Corporate bond market, registered slightly negative returns for the fourth quarter but a gain of 6.9% for the year. All in all, a good year for bonds too.
What’s the outlook for 2020?
Looking forward, many economists and market watchers forecast slow but positive global economic growth over the coming months, while interest rates are also expected to remain low by historical standards. A low rate environment tends to be generally supportive for businesses and asset markets and will remain a key driver of risk assets in 2020. While the synchronized easing of central banks throughout the year means continued easy monetary policy creating a robust global economic cycle. All in all, we appear to be lining up for at least average market returns this year.
The U.S. economy should be able to navigate through 2020 without falling into a recession – odds of a recession in the next 12-18 months are at approx. 30%, but this relies solely on consumption continuing. We view Canada’s growth prospects as favorable in an environment of global economic rebound, with global trade as our main source of risk, countered by healthy growth population, job and wage growth.
As consistent with a mature business cycle, the risks of increased market volatility are building. Growth should pick up in 2020 but will likely be uneven. Getting the sequence right and making strong choices in our security and sector allocations will be important for proving attractive return potential without losing sight of the risks. For many clients this means a lower volatility portfolio using specific sector allocations. With valuations for many assets near record highs, we will want to be well-diversified to maximize returns and mitigate risks as they occur.
In closing, I would also like to thank to you for your continued trust and for the opportunity to assist you in working toward your financial goals. I look forward to discussing your Portfolio and the Market Outlook with you.