4th Quarter Market Outlook: Managing Expectations

When it comes to your long-term investing strategy, there are a few key things to remember, such as: time in the market is more important than timing the market; focus on your goals – not the headlines; and, manage your expectations. With the third quarter behind us and the end of the year approaching, it's a good time to evaluate whether your expectations align with your investing goals.

On that topic, today we'll recap the third quarter and take a look at what we might expect in the upcoming months. First, a look back.

Stocks broadly outperformed fixed income in the third quarter, though performance across global markets was mixed. Domestic equities were fairly flat, while international markets posted gains, led by U.S. stocks. Conversely, emerging-market stocks dipped into bear market territory during the quarter, falling 20% from their January high, as economic and currency headwinds drove the pullback.

It's no surprise the ongoing bull market was top of mind for investors last quarter, and we think the outlook for sustained Canadian and U.S. economic growth, along with strong earnings growth, supports rising stock prices over time. While not as strong, the overseas equity outlook is also positive, with more attractive equity valuations. And, despite potential disruptions from slower trade and higher tariffs, we think underlying fundamentals will keep the bull on track.

Turning to inflation – it has remained near the Bank of Canada's and U.S. Fed's 2% target, allowing central banks to continue to increase short-term interest rates slowly and keep monetary policy accommodative, not restrictive. In addition, foreign central banks continue to provide stimulus, which means these supportive monetary policies can help extend the market and economic cycle.

So, what might investors expect in the coming months?

First, we anticipate domestic growth to remain modest – in the 1.5% to 2.0% range – as household spending faces headwinds from rising interest costs and softer housing conditions.  However, the deal for a new North American trade agreement, along with higher oil prices, should spur renewed business investment, helping cushion slower consumer spending.

South of the border, we think quarterly U.S. economic growth will slow slightly in 2019, as some effects of the fiscal stimulus from the tax cut and budget agreement fade and higher tariffs bite.  And, we believe negotiations will avoid an escalating trade war with China, but the risk remains.  
Third, as economic growth continues, tight labour market conditions are likely to lead to rising wages and costs. Higher tariffs are also raising prices for some products, while supply disruptions from sanctions on Iran and turmoil in Venezuela could push oil prices higher. But, we think fierce competition and cost cutting are likely to keep inflation from increasing beyond the central bank's comfort zone – near 2%.

Today, we've covered the past, and we've glimpsed into what might be ahead for investors. But, what about the present – and what actions can you take today? With year-end just around the corner, it's a good time to talk with your advisor about setting realistic expectations for your investment portfolio's returns.

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.