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Market Insights

Market Update. March came in like a lamb and out like a lion

April 17, 2019

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Market Update. March came in like a lamb and out like a lion

Market Insights

Canadian, U.S. and global equity markets were flat in early March as strong gains in January and February needed some digesting. New developments have provided more “food for thought” as optimism appears to have resumed late in the month.

What are the new developments that have resumed the optimism? 

  • The U.S. Federal Reserve has completely halted interest rate hikes for 2019.
  • U.S. policy makers continue to hint that the U.S. and China are moving closer to a trade deal.
  • Technology stocks from the 1980s and 1990s powered the NASDAQ higher on new products, services and earnings. 
  • China’s March factory activity grows for the first time in four months. 
  • The Eurozone continues to show weakness as the Brexit saga drags on.

See our performance and additional observations below.

ETF Portfolios

ETF Safety Portfolio was up 0.90% in March and 3.57% in the past year. The ETF Safety Portfolio made gains from both its equity and fixed income holdings. Key gains came from short-term bonds and equities holdings overall as well as from the real estate investment trust ETF.
  
ETF Conservative Portfolio was up 1.09% in March and 4.48% in the past year. The Canadian and U.S. fixed income holdings delivered solid gains, while the U.S., Canadian, international, and real estate ETFs added higher gains but at a lower allocation.
  
ETF Balanced Portfolio was up 1.47% in March and 5.80% in the past year. With less allocation to fixed income, the portfolio was able to participate in higher gains from its equity exposure to the U.S. and international equity markets and as well as the real estate sector.

ETF Growth Portfolio was up 1.71% in March and 6.30% in the past year. Due to a higher allocation to U.S. and international equities, which did better than the domestic Canadian equity market, the portfolio posted another solid month of returns. 

ETF Aggressive Portfolio was up 1.98% in March and 7.39% in the past year. As global equity markets continued to rally for the month, the aggressive model (with the lowest fixed income and highest U.S. exposure) was able to fully participate. 

Private Investment Portfolios

Safety Private Portfolio was up 0.98% in March and 4.74% in the past year. Fixed income, real estate and mortgage asset classes helped deliver stable returns. 

Balanced Private Portfolio was up 1.33% in March and 5.68% in the past year. Equity, real estate and fixed income asset classes helped deliver stable returns. 

Aggressive Private Portfolio was up 1.68% in March and 7.22% in the past year. The diversified portfolio benefited from a higher allocation to U.S. asset classes. 

Improving your investments

To better optimize your investments, we’ve made the following changes to some of our ETF portfolios:

Swapped out similar funds to enhance tax-efficiency and performance tracking, while reducing fees and maintaining the same sector exposures

  • ZRE (BMO Equal Weight REITs Index ETF) was replaced with HCRE (Horizons Equal Weight Canada REIT Index ETF)
  • ZPR (BMO Laddered Preferred Share Index ETF) was replaced with HLPR (Horizons Laddered Canadian Preferred Share Index ETF)

Changed the U.S. equities exposure to reduce risk and fees, while maintaining returns 

  • ZWA (BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF) was replaced with 60% HXS (Horizons S&P 500® Index ETF) and 40% ZSU (BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF)

If your portfolio held any of the funds mentioned above, you should see these changes reflected in your account(s) now. 

As always, please let us know if you have any questions. 

Market movers, at a glance

Now, let’s get into the details of what’s affecting your returns. 

Global equity markets were up as the U.S. Federal Reserve implements preemptive measures

The U.S. Federal Reserve (the Fed) has completely done a 180 regarding its interest rate policy for 2019. Originally, it was on autopilot to raise the overnight lending rate 3 to 4 times in 2019, which was not positive for the U.S. and global economies heading into the beginning of the year. This was evident as global stock markets experienced a violent sell-off during the fourth quarter of 2018.  

The Fed took immediate action in January and said it would pause and be patient on its interest rate policy. The Director of the National Economic Council, Larry Kudlow, said he wants the Fed to cut its overnight lending rate (which currently stands at 2.50%) by 50 basis points (0.50%) immediately. This could be the Fed’s next course of action. As the Fed takes the lead on rates, other world central banks could follow. The U.S., Canadian, and global equity markets regained most of their losses in the fourth quarter of 2018 by early April.

Optimism on China and U.S. Trade talks and better China factory activity sparked a strong rally in early April

The rumours of a trade deal between the U.S. and China, which was a key contributor for the continued global equity rally in February, reached another level of optimism as Trump promised an ‘epic’ trade deal with China.

China’s March factory activity grows for the first time in four months

There has been talk and concerns regarding the weakness in China’s manufacturing sector for several months. In March it was reported that China’s factory orders grew for the first time in four months. This was taken as positive news that recent stimulus measures by the Chinese government were having a positive effect.

U.S. stocks higher on positive jobs report and technology names

In the first week of April it was reported by the Labour Department that the U.S. economy added 196,000 jobs, beating the consensus estimate of 175,000. The unemployment rate came in at a multi-decade low of 3.8%. The equity markets reacted positively to the jobs data with a strong open and rally.

While the S&P 500 and Dow Jones Industrial Average have made back most of their losses from the fourth quarter of 2018, the NASDAQ Composite Index is nearing its all-time high of around 8,000. 

The NASDAQ has outperformed in the past few weeks on the strength of old school technology names from the 1980s and 1990s such as Microsoft, Cisco Systems, Apple, Advanced Micro Devices, Nvidia, and Micron Technology. This group of companies have been reporting positive financial results, announcing new products and services, which investors have reacted very positively to.

Canadian economy shows some improvement

Statistics Canada reported that the Canadian economy grew 0.3% in January, which was ahead of the consensus estimate of a 0.1% gain. This improvement came after two previous consecutive months of gross domestic product contraction. The construction sector saw its biggest gains in more than 5-years, which maybe a turning point for the housing market.

Economic data points from Europe continue to remain weak and have been acknowledged by the U.S. Federal Reserve

Germany’s February industrial orders declined 4.2% (the highest rate in more than two years), due to weakness in foreign demand. The data was far weaker than the consensus estimate of a 0.3% increase. As a key global exporter, the weakness could be presenting evidence of a global economic slowdown. 

Italy, the Eurozone’s third largest economy, entered a recession in the fourth quarter of 2018. The outlook for 2019 is for its gross domestic product (GDP) to grow 0.1% which is up from the previous consensus estimate of 0.5%. 

The latest news on Brexit was an extension granting the U.K. permission to remain in the European Union until the end of October. Trade continues to be disrupted as the uncertainty around Brexit continues.

Emerging markets elections and higher crude oil prices should be closely watched in the coming months 

Key elections in Emerging Markets will take place in April. The outcome of these elections could create volatility in the currency and equities markets of these countries. 

After hitting a multi-month low of US$42.53 a barrel on December 25, 2018, West Texas Intermediate (WTI) crude oil has risen unabated for almost 4-months to US$64.58 a barrel, for a gain of 51.8%. Higher oil prices mean higher prices for consumers at the pumps on a global scale. Higher oil prices also create inflation in the global economy and taps into consumer discretionary spending. If higher energy costs continue to rise, this could mean a headwind for the balance of the year.

Conclusion

With global equity markets entering first quarter earnings season, there could be some volatility if results do not meet expectations. Plus, given May to June are generally seasonally weaker for stock gains, gains are likely to soften. And while optimism over the US-China trade deal is helping to prop up sentiment, in our view, the wind can only catch the sail for so many times. 

We believe in taking a long-term perspective when it comes to investing. Our portfolios are professionally managed and diversified to take full advantage of growth and manages risk.

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