- Federal Reserve (Fed) policy and trade tensions disappointed investors but intervention by global central banks will remain a key tailwind to stocks.
- Global manufacturing is cooling but we expect U.S. consumers to remain a pillar of growth given a strong labour market and their solid balance sheets.
- We remain modestly overweight to equities, preferring U.S. and Canadian equities versus EAFE. We continue to think Canada is better positioned for navigating trade war uncertainty.
- We still expect the Bank of Canada to keeps rates unchanged this year while trade wars and market pricing will pressure the Fed to deliver further. Some degree of policy convergence between Canada and the U.S. should help lift the loonie by year end.
Powell-Trump Duo Holds the Key for Equity Upside
After getting cold-showered by the “mid-cycle adjustments” of Fed Chair Powell, investors got ice-bucketed from President Trump’s “beautiful” tariffs early this month. Stocks fell while yields on government bonds touched fresh lows. What matters most for our twelve-to-eighteen month investment outlook and for long-term investors is that the cooling in global growth should not lead to recession in the next year and that central bankers will continue to support the economic outlook with policy accommodation in an attempt to reboot the cycle.
It’s Always Windy at the Top
While global stocks barely rose (MSCI ACWI, +0.2%) last month, U.S. leadership was intact with the S&P 500 climbing 1.4%, sending it to new highs. Nasdaq 100 shares rallied (+2.4%), which took their impressive year-to-date gains to 24.7%. Canadian (+0.3%) and European (MSCI Europe, +0.2%) shares flat-lined last month while emerging-market (MSCI EM, -1.7%) stocks struggled on concerns over softening global demand and the resilience of the U.S. dollar. Finally, Japan’s Nikkei rose (+1.2%), mainly supported by the Bank of Japan’s accommodative tone.
Growing evidence that growth is slowing more than expected in Europe kept a lid on yields of global government debt. However, resurging trade-war drama early this month drove yields on 10-year government debt in the U.S. and Canada to their lowest levels since 2016. Powell’s “mid-cycle-adjustment” remarks were badly received by investors who saw increasing risks of a Fed policy error by failing to recognize the need for rate cuts, which pressured the 2-10 yield curve down by 10bp last month. The steady re-acceleration of the Canadian economy was not enough to lift the loonie (-0.75%) in July, but it remained the best performing G10 currency as the Buck held strong.
Equity Factors: Quality Shines in Uncertain Times
With little dispersion in global equity markets, equity factors also saw muted dispersion. Quality (+1.7%) did well again in July, along with Growth (+1.0%) and Momentum (+1.0%). Meanwhile, the High-Dividend factor fell slightly (-0.6%). Year-to-date, a simple equal-weighted, factor-based portfolio has outperformed the benchmark by 230bp. We continue to expect large-cap stocks to outperform small ones as small-cap profit margins struggle from strong labour markets feeding into wage pressure and tighter lending standards, resulting in worsened credit availability.
July was another good month for Canadian Low-Vol (ticker: ZLB, +1.6%) stocks, the seventh consecutive monthly gain. Year-to-date, Low-Vol stocks are now ahead the broad market (ticker: ZCN) by roughly 150bp (16.5% vs 18.0%). We like strategically and tactically owning Low-Vol Canadian stocks.
Negatively-Yielding Debt Sky Rocketing
With global yields falling quickly since last October, the world’s stock of debt that carries negative interest rates has sky rocketed from $6 trillion to a staggering $15 trillion (Chart 1). For investors, it’s increasingly difficult to get positive returns from fixed-income assets. With negative interest-rate policies set to expand, we believe investors will be forced to trim their fixed-income allocations in favour of stocks and other risky assets.