The Investing Landscape in 2019

By: Craig Fehr, CFA February 20, 2019

When we think about the investing year ahead, it's helpful to put things in context. Topics such as market volatility, talk of a recession and trade issues are often the focus of investors' questions. Today we'll provide some perspective around those topics to help you stay focused on your long-term goals.

First, let's talk about market volatility. Investors are wondering about the possibility of a recession, and are asking - are we headed into a downturn?

The short answer is we don't believe a recession is looming. However, we do expect GDP growth to slow a bit in 2019, with Canadian GDP expanding at around a 2% pace, compared to the 2.3% average of the past three years - and a long-term average close to 3%. We think a recession will be avoided this year, but economies are cyclical and a downturn will eventually emerge. The Canadian economy will likely face headwinds from consumer debt, a weaker housing market and fluctuating commodity prices.

Staying domestic, let's look at indicators that influence the direction of our economy.

First, the labour market is certainly one of the most important drivers of the economy, given consumer spending accounts for roughly 60% of Canadian GDP and 70% of the U.S. GDP. We think employment conditions will continue to be supportive this year. The domestic unemployment rate recently reached a 40-year low and the economy is still adding jobs. That said, wage growth has been fairly muted, which coupled with a slowdown in housing will, in our view, drive more modest household spending growth in Canada this year.

As we look ahead, we expect the 2019 investment landscape to evolve in the latter phase of this economic cycle. Specifically, monetary policy has shifted from stimulative to neutral, while other influencers – such as housing and auto sectors – are aging. Markets could be more sensitive to what will likely be a more balanced mix of encouraging and underwhelming economic readings.

With so much in the headlines lately about global economies, investors ask – how important is trade?

In 2018, uncertainty surrounding trade negotiations was a key source of market volatility. We entered 2019 with some resolution to trade conflicts, including a proposed trade agreement among the U.S., Canada and Mexico, as well as potential advances in trade talks with the U.S. and China – a key source of global market anxiety. Trade tensions are likely to remain a source of volatility in the near term, but we anticipate progress this year, not the emergence of a global trade war.

Trade is important to global growth, and in fact, over two-thirds of Canada’s economy, a quarter of the U.S. economy and over half of global growth is tied to trade, while S&P 500 companies earn about 40% of their revenue from international markets.

We think trade could provide a modest lift to the Canadian economy this year. And although lower oil prices are a negative, solid growth in the U.S. and a lower Canadian dollar offer some support to the domestic trade outlook.

So what does all this mean for investors?

We believe the fundamentals of economic and earnings growth are still favourable enough to provide this bull market with a runway this year, but the terrain is going to be bumpier.

Stock markets have staged a healthy rally in recent weeks, generally rewarding investors that stayed calm in the face of the December panic. We have now experienced four corrections - declines of 10% or more - in the past four years, directly in line with the average since 1900 of one correction per year – a reminder that despite the uncomfortable nature of market pullbacks, volatility is in fact a normal part of investing. Being a long-term investor does not require you to ignore shifts in the market, but it does require and reward perspective and discipline. Stocks have now recouped more than half of the late-2018 total decline.

We doubt the markets will move in a straight-line higher from here, but the recent rally is a reminder that the decline in December was not a one way path toward a severe bear market, and that the underlying fundamentals are still supportive.

As a long-term investor, try to keep realistic expectations for both the return and the risk of your portfolio. Then put yourself in a position to stay on track by making decisions and adjustments that align with your long-term goals, not today's headlines. Doing so can allow you to navigate market volatility as a buying opportunity, if appropriate for your situation.

Talk with your Edward Jones Advisor to ensure your goals, lifestyle and any changes to your situation are reflected in your personalized investing strategy.

Equity investments carry risk, including the loss of principal. There are special risks inherent in international investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks.

Important Information:

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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