Weekly Market Update (April 15, 2019 – April 18, 2019)

In a holiday-shortened week, stocks gyrated around the flat line in the U.S., while Canadian stocks finished higher. Weakness in the health care sector as a reaction to increasing U.S. political headlines was offset by healthy gains in industrial stocks, driven by solid earnings and better-than-expected manufacturing data from China. With valuations having rebounded back to historical averages for both the TSX and the S&P, major indexes are now trading near all-time highs. We think corporate earnings will likely be the key to driving markets higher for the balance of the year. With about one-third of the companies in the S&P 500 reporting first-quarter results this week, investors will have plenty to digest. Earnings reports can prompt volatility in individual stocks. Owning a sufficient number of stocks in your portfolio can help reduce this volatility.

When riding a rollercoaster, you go up, you go down, and you end up back where you started.  Over the past seven months, the stock market has traveled a similar path. The TSX has reached a new high and the S&P 500 is essentially back to its peak of last September, sitting just slightly more than half a percent from an all-time high. With investors strapped in for the ride, which included a sizable pullback late last year and historically strong gains to start 2019, we'd note five important takeaways for investors:

1. The stock market's track is not necessarily your track. Diversification and balance in your portfolio – especially the inclusion of bonds – means you can travel a smoother path versus the sharper peaks and steeper drops in the TSX, S&P 500 or Dow. 
2. The strong rally in the stock market so far this year is certainly beneficial and representative of still-positive investment conditions, but it's your long-term goals and tolerance for risk that should be your personal measuring stick for your portfolio, not the specific high-water mark of the stock market. As with any journey, you get ahead of pace at times, and can fall back at others, but it's the broader pace and progress toward your destination that ultimately matters.
3. As punitive as the sell-off in December may have felt at the time, short-term disruptions, even within a strong bull market, are normal.
4. A disciplined strategy and a longer-term perspective rewarded investors that avoided panic and stayed invested.
5. Market volatility can present opportunities for long-term investors. At the time, we felt the December sell-off was overdone relative to the still-positive outlook for economic and earnings growth. Thus, the recovery of those losses is appropriate, in our view. At the same time, the market has gained more than 15% year-to-date, rising in two-thirds of all trading days and experiencing a maximum pullback of just 2.5% along the way¹ – a rally that is perhaps not fully representative of the greater balance of risks and opportunities that exists at this stage in the cycle.

We think there is still more upward track ahead for this bull market, but investors should expect more twists and turns as we advance. With the stock market having returned to the same perch it occupied before the late-2018 drama, it's useful to consider what's changed…

• …since the last time we were here? The previous high for the TSX was last summer, and the last time the S&P 500 was at all-time highs was late-September. Then, the U.S. economy had gained momentum with GDP growth having exceeded 3% for two straight quarters for the first time since 2015¹. The economy is in a slightly lower gear today, growing at a pace just above 2%. In Canada, GDP growth had ticked up by mid-2018, but had already slowed meaningfully from the levels of late-2016 and early 2017 (helped by the recovery in oil prices). When the market was last here, the Fed was still in tightening mode, having just hiked rates for the eighth time in three years in response to a firming economy, historically low unemployment, and rising inflation expectations. The Fed has a more dovish stance today given softer economic readings, signaling it will pause on further rate moves until economic data warrant further adjustments. Because of this, longer-term interest rates have fallen. In September, 10-year rates were 2.6% in Canada and near 3.1% in the U.S., compared with less than 1.8% (Canada) and 2.6% (U.S.) now, reflecting the Fed policy pivot and a more moderate growth outlook¹.  Market valuations are more favorable today, however.  The last time we were at record highs, the S&P 500 traded at 17.4 times expected earnings, compared with 16.9 times currently², indicating the outlook for rising corporate profits.  Overall, while the market is at the same record level, the underpinnings have shifted a bit. Economic growth is more modest, but rates are lower, Fed policy is less restrictive, and corporate profits are higher, suggesting to us that the bull market doesn't have to run out of gas at this altitude.
• …since the lows of December?  The market looks quite different from year-end, with Canadian stocks up 20% and U.S. stocks 24% higher since Christmas Eve¹. At the time, fears of an impending U.S. recession had risen appreciably, due to the Fed's rate hike campaign and a patch of tepid economic readings related to consumer spending and to the housing and auto sectors. Today, while the pace of U.S. growth has moderated (in part due to the fading boost from tax cuts), data is signaling the U.S. economy is still on sound footing. Last week brought a stable of fresh readings, including reports showing that U.S. jobless claims fell to their lowest level since 1969 and retail sales rebounded strongly in March (led by upswings in autos, building materials, furniture and clothing). They key difference for the domestic market centers on oil prices, which are up 50% from December, helping lift the TSX in spite of mounting signs that the Canadian economy is likely to grow at a slower pace ahead. Last week also brought the release of China GDP, showing the world's second-largest economy grew by a better-than-expected 6.4% last quarter, a welcome sign of potential stabilization amid a prolonged slowdown¹. With a pessimistic global outlook last December centered on accelerating weakness in China and around the world, more recent data suggest global growth may be steadying.  For perspective, while the Canadian and U.S. rallies since December have brought stocks back to last year's high, emerging-market equities are 6% above their level of last September. Overall, market sentiment has improved considerably since December, boosted by evidence that a U.S. recession is not imminent and by the Fed's  more supportive policy approach.  The market has come a long way in a short amount of time, and while we think the gains are justified by the fundamentals, investors should prepare for greater volatility as we progress through the year.
• …since similar performances in the past?  – Following the financial crisis in 2008, the S&P 500 first achieved a new record high in early 2013. Since then, it has set 219 all-time highs (an impressive 14% of all trading days), indicating that new highs aren't a sign of exhaustion³.  There have been four 10% corrections since the market first began setting new highs in 2013. The catalysts for those pullbacks were different each time, but the driving force behind the subsequent rebounds was consistent – an expanding economy, earnings growth, and low interest rates, all conditions that remain in place today.  And although the S&P 500 has returned to record levels, other investment categories have performed differently.  For example, the Russell 2000 (small-cap stocks) is up 23% since December, but remains 10% below all-time highs.  And while developed-market overseas stocks have posted strong gains this year, they are still down 12% from their 2018 high and are 19% below the record high in 2007¹. So while the performance of various markets and asset classes has differed, the importance and value of diversification and a disciplined portfolio-rebalancing strategy remains the same.  

Craig Fehr, CFA
Investment Strategist

^{Sources: 1. Bloomberg, 2. Bloomberg S&P 500 consensus earnings estimates, 3. Factset, Edward Jones calculations}

^{: Bloomberg, 04/18/19. *5-day performance ending Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.}

The earnings season will take center stage this week, with about one-third of the companies in the S&P 500 reporting first-quarter results. Economic data will be light on the week in Canada, with the Bank of Canada's rate decision being the main event. Exchanges across Europe will be closed on Monday as part of the Easter weekend.