The market downturn that almost everyone was expecting became a reality in the last quarter. While October has a reputation as being a weak month, the market was certainly not in the Christmas spirit as the drop worsened into December. Unfortunately, the Grinch gave investors lumps of coal in their portfolios and on Christmas Day everyone wondered what happened the day before with the largest points drop ever on a Christmas Eve for the S&P 500 and the Dow Jones.
Now for the good news… the fixed income foundation of client portfolios did their job during the drop in the equity markets. While many other investors were nursing bruised portfolios, the alternative fixed income funds and other ultra-short term investments proved to be the rock in the stormy waters. Gold bullion also added further stability, along with the positive effects of the falling Canadian dollar; while it may not be comforting to hear about the Canadian dollar falling in value, this is actually good news for US equity holdings in your Canadian portfolio as the drop causes them to rise in value.
Lastly, don’t forget just like we cannot have the rejuvenation of the springtime without first going through winter, we cannot have bull markets without going through bear markets. Valuations are coming down and are now beginning to look more attractive; eventually the stage will be set for another bull market.
I’m sure the question on everyone’s mind is what might we expect for 2019? We are certainly not proponents of making market predictions or trying to time market events, however, one can take a simplified approach and look at the probabilities of three events occurring over the next year:
Continued weakness: Given that we have come out of the longest bull market in history, and we have just barely broken into bear market territory (a drop of 20% or more), there is a higher probability that we could see further weakness in 2019 as investors grapple with uncertainty both economically and geopolitically.
Flat with no significant direction by year’s end: This scenario is also very likely and 2019 could be a combination of both scenarios 1 and 2 – further weakness in 2019 taking stocks well into bear market territory, but rallying back to around plus/minus the breakeven point by year’s end.
Canadian Equity Index/Factor Q4 2018 TSX Composite -10.1% -8.9% Large Cap -8.9% -7.6% Small Cap -14.4% -18.2% Growth -10.1% -8.3% Value -10.5% -9.7% The start of another bull market: We view this as highly unlikely as current economic uncertainty about rising rates, the knock on effect of a possible recession, geopolitical uncertainty, China’s economy, etc. are not conducive to taking the market higher. On the other hand, we could be surprised. This all comes back to properly engineering portfolios that capture the upside but also protects on the downside, rather than attempting to predict the market’s direction and trying to trade its ups and downs.
Canada – The S&P/TSX Composite fell ‑10.1% in the last quarter and was down ‑8.9% for the year. Looking at its peak to trough performance, it fell ‑16.9% from its high in mid-July to the low on Christmas Eve. All factors were down in 2018 with small caps weaker than large cap, down ‑18.2% for the year; value fell ‑9.7% for the year and was weaker than growth.
United States – Equities south of the border officially fell into bear market territory with the market falling ‑20.9% from its high in late September to the low on Boxing Day. For the quarter the market fell ‑14.3% and ended the year down ‑5.2%. For the year, small caps were weaker than large caps and value underperformed relative to growth. However, a weak Canadian dollar was good news for us Canadian investors as it helped to erase almost all of the losses for the calendar year; only value and small caps were down ‑0.3% and ‑1.2%, respectively in CAD terms.
International & Emerging Markets – International and emerging markets equities also entered bear market territory and were down ‑7.5% and ‑2.2%, respectively in Q4 while international finished the year down ‑5.6% and emerging markets were down ‑6.5%, all in CAD. Again, both small caps and value were the weakest factors in 2018.
Real Estate – On the whole, real estate was only slightly affected by the market weakness with Canadian real estate down ‑3.8% in Q4 but finished the year up 6.3%; international real estate was barely down ‑0.1% in Q4 and was up 4.4% for the year.
Alternative Fixed Income – Canadian bonds rose 1.8% this past quarter and were up 1.4% for the year.
The alternative fixed income funds continued to show consistent performance with Trez up 8.0% for 2018, Productivity Media up 7.3%* and Cortland up 5.8%. The Stewardship Alternative Income Fund was up 1.7% for the year, despite the fall in FinCanna.
Gold – Gold rallied 7.1% in USD this quarter as investors fled to safety; thanks to the rise in the US dollar, gold climbed 12.9% in CAD terms.
*Estimated as actual return figures were not available at the time of publishing
Market Commentary – Q4 2018
The market downturn that almost everyone was expecting became a reality in the last quarter. While October has a reputation as being a weak month, the market was certainly not in the Christmas spirit as the drop worsened into December. Unfortunately, the Grinch gave investors lumps of coal in their portfolios and on Christmas Day everyone wondered what happened the day before with the largest points drop ever on a Christmas Eve for the S&P 500 and the Dow Jones.
Now for the good news… the fixed income foundation of client portfolios did their job during the drop in the equity markets. While many other investors were nursing bruised portfolios, the alternative fixed income funds and other ultra-short term investments proved to be the rock in the stormy waters. Gold bullion also added further stability, along with the positive effects of the falling Canadian dollar; while it may not be comforting to hear about the Canadian dollar falling in value, this is actually good news for US equity holdings in your Canadian portfolio as the drop causes them to rise in value.
Lastly, don’t forget just like we cannot have the rejuvenation of the springtime without first going through winter, we cannot have bull markets without going through bear markets. Valuations are coming down and are now beginning to look more attractive; eventually the stage will be set for another bull market.
I’m sure the question on everyone’s mind is what might we expect for 2019? We are certainly not proponents of making market predictions or trying to time market events, however, one can take a simplified approach and look at the probabilities of three events occurring over the next year:
Canada – The S&P/TSX Composite fell ‑10.1% in the last quarter and was down ‑8.9% for the year. Looking at its peak to trough performance, it fell ‑16.9% from its high in mid-July to the low on Christmas Eve. All factors were down in 2018 with small caps weaker than large cap, down ‑18.2% for the year; value fell ‑9.7% for the year and was weaker than growth.
United States – Equities south of the border officially fell into bear market territory with the market falling ‑20.9% from its high in late September to the low on Boxing Day. For the quarter the market fell ‑14.3% and ended the year down ‑5.2%. For the year, small caps were weaker than large caps and value underperformed relative to growth. However, a weak Canadian dollar was good news for us Canadian investors as it helped to erase almost all of the losses for the calendar year; only value and small caps were down ‑0.3% and ‑1.2%, respectively in CAD terms.
International & Emerging Markets – International and emerging markets equities also entered bear market territory and were down ‑7.5% and ‑2.2%, respectively in Q4 while international finished the year down ‑5.6% and emerging markets were down ‑6.5%, all in CAD. Again, both small caps and value were the weakest factors in 2018.
Real Estate – On the whole, real estate was only slightly affected by the market weakness with Canadian real estate down ‑3.8% in Q4 but finished the year up 6.3%; international real estate was barely down ‑0.1% in Q4 and was up 4.4% for the year.
Alternative Fixed Income – Canadian bonds rose 1.8% this past quarter and were up 1.4% for the year.
The alternative fixed income funds continued to show consistent performance with Trez up 8.0% for 2018, Productivity Media up 7.3%* and Cortland up 5.8%. The Stewardship Alternative Income Fund was up 1.7% for the year, despite the fall in FinCanna.
Gold – Gold rallied 7.1% in USD this quarter as investors fled to safety; thanks to the rise in the US dollar, gold climbed 12.9% in CAD terms.
*Estimated as actual return figures were not available at the time of publishing