Stocks rose globally on optimism that Chinese and U.S. officials made progress in negotiations that laid the groundwork for a truce on additional tariffs. Positive comments on the Brexit front added to the optimism, leading international developed-market stocks to record their biggest weekly rise in four months. We think reduced uncertainty can be a catalyst for improved returns in international equities, but we would also caution that trade negotiations are ongoing, and more twists and turns could prompt volatility, as they have in the past.
Our Quarterly Market Outlook
Stocks appear on track to finish the year strong, with the S&P 500 near a record high, despite a volatile past quarter during which slower global growth and trade tensions caused recession fears to spike. Twists and turns on the U.S./China trade front continue to drive market swings, with stocks rising last week on optimism that both sides are looking at a phased approach to a trade deal, which was announced after market close on Friday. This incremental progress is encouraging, but additional phases of agreement or a larger deal that includes key issues like intellectual property, technology transfers and enforcement will likely take more time. Thus, trade issues will remain a source of volatility. More broadly, we expect stocks to continue to rise but at a slower pace than they have over the past few years, supported by ongoing economic growth, earnings growth and lower interest rates. Here is an overview of our latest quarterly market outlook:
Economic Outlook: Slower Growth but No Recession
We don’t see a recession materializing in the coming year, extending this already longest-ever expansion through 2020. A healthy labour market and fresh stimulus from the Federal Reserve are key pillars of support, but trade, election and geopolitical uncertainties are increasing headwinds. We think the Canadian and U.S. economies will grow at below-trend pace in the 1% - 2% range next year, with domestic growth slightly below that in the U.S.
Equity Outlook: Uncertainty Drives Volatility
We expect equities to outperform bonds this year based on a slowing but still-supportive macroeconomic backdrop and steady corporate fundamentals. Risks tied to geopolitical concerns, trade uncertainties and slowing global growth will continue to make it a bumpy ride in our view.
Fixed Income Outlook: Interest Rates Lower for Longer
The U.S. inversion of the yield curve this year has raised worries of an approaching recession. However, despite trade uncertainty and slowing global growth, we don’t think a U.S. or Canadian recession is imminent. We expect equities to outperform fixed-income investments, but bonds will, in our view, continue to help stabilize investor portfolios during normal bouts of volatility.
International Outlook: Challenges Remain but Expansionary Policies Improve Prospects
Overseas equities underperformed last quarter as trade tensions escalated and manufacturing activity contracted. Trade and other geopolitical uncertainties, including Brexit, are likely to keep volatility elevated, but we expect growth to stabilize and returns to improve.
Sources: S&P Indices Data
Angelo Kourkafas, CFA
Craig Fehr, CFA
Nela Richardson, PhD
|S&P 500 Index||2,970||0.6%||18.5%|
|10-yr GoC Yield||
|Canadian Dollar||US $0.76||0.8%||3.3%|
Bloomberg, 10/11/19. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
In a holiday-shortened week in Canada, important economic data being released include inflation on Wednesday and manufacturing shipments Friday. In the U.S. the third-quarter earnings season kicks off on Monday, with 6% of S&P 500 companies reporting earnings throughout the week.
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