What Happened to Global Stocks?

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I was in to see an old friend from the wealth management business yesterday. Historically, global equities have been an important part of his firm’s investment focus. But the sector’s consistent poor performance is having exactly the effect you would expect.

“I’ve got this big leaky boat,” he said to me. That can only mean one thing in the money management business: clients are withdrawing their money and taking it elsewhere. Redemptions.

“We’re busy building a new boat inside the leaky boat.” That means his firm is developing new investment strategies to attract investors burned by global stocks.

What happened? The numbers below from The Wall Street Journal Market Data Center highlight how broad-based the downturn was in 2018. Keep in mind these are year-to-date numbers. Long-term investors (which includes anyone saving for retirement), should never overreact to one-year returns.

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Still, it’s important to understand what’s going on. A lot of this negativity came up in the fourth quarter of last year. Does all this red ink signal an incoming global recession?

Opinions are split. Some believe this correction has brought stock prices down to a more reasonable level. In fact, we have seen signs of a turnaround since the holidays. It stands to reason that stock valuations would come down as central banks push interest rates up.

Others are worried about weakening manufacturing numbers and the nearly inverted yield curve. That’s a measure of the difference between the U.S. 10-year and 1-year Treasury Notes.

Typically, investors demand a higher yield on 10-year notes because they have to wait longer to cash out. When investors lose confidence in the short-term economy, that gets turned upside down. They have less confidence in short-term bonds so they demand a higher yield. We watch the U.S. Treasury Notes because recessions in that country have such a consistent impact on the global economy (particularly ours here in Canada).

In a note to investors yesterday, RBC Wealth Management’s Jim Allworth wrote: “We would point out that the yield curve has not yet inverted … and it is not a forgone conclusion that it will in the near future.”

The bank predicts that the U.S. will “go on growing into and perhaps through 2020.”

Yesterday’s edition of Scotiabank’s Global Outlook struck a similar tone. “Our forecast currently calls for global growth to slow from 3.7% in 2018 to 3.5% in 2019. However, the evolution of equity markets through the fall, along with movements in the yield curve suggest a much greater markdown in growth is anticipated, including possibly a recession in some countries. … Our own recession probability model for Canada, which considers a range of economic and financial variables, suggests the risk of a recession remains very low.”

The report goes on to note that there would have to be some kind of “trigger,” such as a worsening of the U.S.-China trade relationship to make recession likely.

So while stock markets are flashing warning signs, there is no consensus that a recession is around the corner. And again, one-year returns should never drive dramatic changes in a diversified investment portfolio designed to achieve long-term goals.

Just the same, keep an eye out. This is a good environment to be managing your expenses carefully and giving some thought to an emergency savings fund.

Kevin Press

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