The combination of better-than-expected economic data, encouraging corporate earnings from U.S. banks, and the signing of the "phase-one" trade agreement pushed Canadian and U.S. stocks to fresh record highs last week. Strong U.S. retail sales and a surge in U.S. housing starts point to a resilient consumer supported by the health of the labor market. The long-awaited "phase-one" trade agreement between the U.S. and China was formally signed last week, largely meeting expectations. Specific terms included commitments from China to increase purchases by $200 billion over the next two years ($78 billion of manufactured goods, $52 billion in energy, $32 billion of agricultural products, and $38 billion in services). We believe that the agreement removes some uncertainty, but trade issues will likely remain a source of volatility in the year ahead.
Stocks closed at record highs last week as the U.S. and China signed the long-awaited "phase-one" trade agreement. The terms of the deal were largely in line with expectations and included commitments from China to increase its purchases of U.S. goods and services by $200 billion over the next two years.
In our view, the recent trade agreement is a major step towards de-escalation of the trade tensions between the two countries. It removes the near-term threat of new tariffs and raises the hopes for a more comprehensive deal to be achieved. However, tariffs on two-thirds of U.S. imports from China remain in place, and attention now shifts to implementation and enforcement. Potential failure to meet the terms of the deal can create temporary setbacks and result in additional retaliatory tariffs. We believe further tariff relief, or a more comprehensive truce including structural issues, like industrial subsidies, is unlikely to materialize before the U.S. election. Last week's agreement removes some uncertainty, but trade issues will likely remain a source of volatility in the year ahead. More broadly, we expect Canadian and U.S. stocks to continue to rise but at a slower pace than they have over the past decade, supported by ongoing economic growth, modest earnings growth, and accommodative central banks. Here is an overview of our latest quarterly market outlook:
Economic Outlook: Consumers Lead the Way
We expect Canadian growth to be between 1.5%-1.8% in 2020. We expect consumers to fuel the economic expansion. In addition, accommodative monetary policy should provide a modest support to the economy in the first half of 2020.
Equity Outlook: More Moderate Gains Ahead
2019's gains were among the strongest of the 2000s and well outpaced our expectations. We don’t think this exhausts the bull market’s tank, but it does temper our expected return for this year.
Fixed Income Outlook: Long-term Rates Likely to Rise Modestly
We expect equities to outperform bonds this year as moderate economic growth continues, with no recession imminent. However, political and other uncertainties could drive volatility higher, highlighting the stabilizing role fixed-income investments typically play during market pullbacks.
International Outlook: Global Growth on Track to Rebound
International stocks performed well in 2019 but still trailed Canadian and U.S. stocks amid trade and other geopolitical uncertainties. Challenges remain, but there are signs global manufacturing may be stabilizing. We expect a modest re-acceleration in global growth. Which, together with depressed valuations and a likely rangebound Canadian dollar, could position international investments to outperform in 2020.
Angelo Kourkafas, CFA
Craig Fehr, CFA
Nela Richardson, PhD
Sources: 1. FactSet 2. Bloomberg
|S&P 500 Index||3,330||2.0%||3.1%|
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|Canadian Dollar||US $0.77||-0.1%||-0.7%|
Important economic data being released in Canada include manufacturing sales on Tuesday, inflation and the Bank of Canada rate decision on Wednesday, and retail sales on Friday. U.S. markets are closed on Monday in observance of the Martin Luther King Jr. holiday.
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