Nervous Markets

Once again, volatility has reasserted itself at levels not witnessed since the February market rout.  Nervous investors have fled indiscriminately from risky assets amid fears that rising interest rates will erode global growth, corporate profits, and equity valuations – while ongoing trade tensions between the world’s two largest economies and tightening financial conditions have also battered sentiment.  Notably, investors remain on edge about the prospect of “peak earnings” as the Q3 reporting season gets underway and are paying close attention to the recent spate of profit margin warnings, while gauging how earnings will be impacted in the environment of rising borrowing costs, higher commodity prices, an acceleration in wages, and the impacts from newly imposed tariffs.  The rout in equity markets has been fairly broad in nature, with no region left unscathed.  More than $6.7 trillion has been swept from global equity values since late September as the world’s major bourses have retreated from their recent highs.

INVESTMENT OUTLOOK & STRATEGY

While volatility is surely to prevail as investors adjust to the environment of rising rates, lingering global trade uncertainties, and political upheaval in Europe – the fundamental underpinnings for risk assets remain largely intact over the coming year, in our view.  As conditions for a pronounced global economic deceleration and a corresponding recession are all but elusive at this time (until late 2020), we anticipate that this latest market pullback is simply a short-term correction within a cyclical bull market.

• GROWTH:  Despite the hostile trading environment, we expect the global economy to continue thriving.  Economic momentum remains fairly robust in general, allowing the global economy to absorb higher interest rates and help to alleviate margin pressures.
• CENTRAL BANKS:  The fiscal impetus from both the US and China is set to extend the economic upturn into 2019 and provide a buffer as major central banks take coordinated steps towards monetary policy normalization. 
• VALUATIONS:  Equity multiples have contracted in this sentiment-driven pullback – even as earnings expectations remain elevated.
• SENTIMENT:  Overly-optimistic and complacent behaviours have translated into heightened levels of investor angst.
• TECHINICALS:  However, in the tumultuous trading backdrop, we have yet to reach a capitulation point.  Investors have been reluctant to step back in with a “buy the dip” mentality to date – which argues for ongoing market gyrations in the near-term.

As previously communicated, with volatility comes opportunity.  As such, we will be closely monitoring market levels and (barring any new developments on the macro front) would look to re-establish an overweight allocation to global equites if the S&P 500 were to breach the 2550-2600 mark (2%-5% more downside from current levels).

 

Candice Bangsund, Vice President and Portfolio Manager, Global CIO Office

 

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Index Definitions

The Standard & Poor’s 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.