Market Outlook: 4th Quarter

2019 is winding down, and it’s been an eventful year so far. The volatility that picked up late in 2018 continued through much of this year, while 2019 has seen the emergence of new issues as well. What’s in store for the markets as the year ends?

A quick recap

The market experienced wide swings during the third quarter, hitting all-time highs in July, pulling back in August on trade and recession worries and then rebounding in September to finish the quarter back near the highs. With the spotlight bouncing between good news and developing risks, the fluctuations were driven by a few factors:

• The ongoing trade saga between the U.S. and China
• Federal Reserve interest rate moves
• Healthy consumer trends mixed with a slowdown in manufacturing and the global economy

All told, the stock market is up more than 15% so far this year, but the path higher has been choppy. Looking ahead, as we move through the remainder of the year and into 2020, we think the fundamental backdrop remains favourable for investors, but a list of risks that includes lingering trade tensions, uneven global growth and political uncertainties like Brexit and the upcoming U.S. election means periodic pullbacks should be anticipated.

3 key views

Our outlook includes the following key views:

1. Positive, but slower economic growth, with the pace in Canada trailing that of the U.S. Domestically, this year's strong job growth has provided a lift to our outlook for consumer spending, though elevated household debt levels and a cooling housing market will hold back GDP, in our view. South of the border, we think fears of an imminent recession are overblown. A 50-year low in unemployment and rising wages offer support to consumer spending, which makes up the lion's share of the U.S. economy. The trade issues with China are likely to linger on, weighing on business investment and the manufacturing sectors, but overall, economic signals are consistent with the expansion extending beyond the coming year.
2. We expect interest rates to remain low. Low inflation in Canada alongside persistent housing market risks is keeping the Bank of Canada on the sidelines. Meanwhile the U.S. Fed has shifted to a more stimulative policy stance to extend the expansion. We think the Fed is likely to cut rates again, which is helpful for the economy and stock market, though it may not cut as much as the market is expecting over the coming year.
3. We think the bull market has room to run. We're in the latter stage of the cycle, in our view, but we believe equities are still poised to deliver gains and outperform bonds in the year ahead, helped by modestly-rising corporate profits, reasonable valuations, supportive central banks and a stabilizing global economy.

Risks still exist

The positives still outweigh the negatives at this stage, but the risks shouldn’t be ignored:

• Trade uncertainty is curbing business spending and manufacturing activity.
• Headlines around U.S. impeachment and the upcoming election will keep markets on edge.
• Risks abroad, such as Brexit and China’s slowdown, pose upcoming headwinds.

We don’t anticipate a repeat of 2018’s end-of-year selloff, but we do think these prevailing risks will prompt pullbacks as we move through this year and into 2020.

The path ahead

Our investment outlook remains fairly positive, but the path ahead won't be smooth. When you see headlines about a drop in the TSX or S&P 500, remember that with a diversified portfolio, 

1. You don't simply own the stock market. Instead, you own a more diversified mix of equities as well as bonds, and therefore your portfolio’s performance will be different. And 
2. Your goals are long term and your perspective should be, too. While markets will fluctuate day to day, a wider view of your portfolio can help you make decisions that are best suited to keep you on track. If market swings have you concerned, talk with your advisor to ensure your portfolio is properly balanced in alignment with your comfort with risk and long-term goals.