Market Commentary – Q4 2019

The start of a new year is always a good time to look back and reflect on the one that just finished. We have come a long way since this time last year when the markets had been jittery for months as a result of Trump’s tariffs, the Bank of Canada raising interest rates and a sharp market drop at the end of 2018. As markets began to rise last January, investors wondered if that was only a temporary recovery before the start of a prolonged and deeper bear market that many were predicting.

Investors who panicked and sold in December or early January would have sold near the bottom and likely missed out on the best month of the whole year and a significant portion of the total returns for all of 2019 – anywhere from approximately 15% to upwards of 38% of annual returns just for missing January! While it may be uncomfortable to do nothing during market turbulence, and especially buy into the market at that time, no one knows when the bottom will occur. In hindsight, it is often better to stay the course and not react impulsively.

Fast forward to today, and 2019 turned out to be one of the best years since 2013 (2016 for Canadian equities). Back in January, I don’t believe many people would have predicted a 20%+ rise in North American markets, the resumption of falling interest rates, a rise of over 6% in bonds and a rally of over 13% in gold. This is a perfect example of how unpredictable the markets really are.

Looking ahead, what might 2020 bring? There is a good probability that equity returns this year will be more subdued and there will not be a repeat of the strong returns of 2019. A number of catalysts exist that could influence the direction of the markets to varying degrees – increased tensions in the Middle East; the US Presidential election; global economic outlook and continuing tariffs and trade wars, just to name a few.

After the surprise attack that killed Iran’s top general on January 3rd, tensions seem to have subdued somewhat after the tragic downing of the Ukrainian airliner on January 8th; however, given the volatile nature of the Middle East (as well as Trump’s style of decision-making) events could take a sudden and unexpected turn that may have a negative impact on the markets. As a hedge against such geopolitical risks, we maintain a 5% allocation to gold bullion.

One of the most anticipated events of 2020 is the US Presidential election on November 3rd. The world will be focused on whether or not there will be another four years of unpredictable and unorthodox politics from Washington. The Democratic nomination is still up in the air at this point – will the successful candidate be more traditional and moderate, or will it be someone with more left-leaning views on the direction of social policies in the US? If a left-leaning Democrat ends up winning the Presidency, this would likely create uncertainty in both the US economy and the markets, which would likely have a negative impact.

Last, but certainly not least, is the outlook for the global economy. One of the major global topics for the past year and a half has been the ongoing trade war between China and the US. Even though Trump hailed the recent signing of a trade pact with China, it actually does little to address key US allegations; nor does it remove existing tariffs, but it does de-escalate the tariff war by dropping plans for new tariffs and cutting the current rate in half on $110 billion worth of Chinese products. Monetary policy and the direction of interest rates is another variable for the global economy. While there may be little expectation for rate increases this year, there were also few expectations for rate decreases in 2019.

Last year turned out to be a pleasant surprise for investors, which reinforces the fact that financial markets are difficult to predict. One must remember to take the abundance of predictions that appear at the beginning of a new year with a grain of salt and to focus on factors within one’s control – proper diversification, prudent financial planning and managing risk, which all combine to lead you towards your own personal goals and objectives.

Market Summary

Canada – The TSX Composite was up 3.2% in Q4 and up 22.9% for the year; growth and large cap lead the way, up 22.3% and 21.9% for the year, with value and small cap up 21.6% and 15.8% bringing up the rear.

United States – US equities pulled ahead in the last quarter with strong returns to capture first place for the highest returns of 2019 (both in USD and CAD terms). US growth and large cap were up 29.0% and 24.8%, respectively, followed by small cap up 20.9% and value at 19.9% (all in CAD).

International & Emerging Markets – While not as strong as the Canadian and US markets, foreign equities produced very respectable returns for 2019 with international up 16.5% and emerging markets gaining 12.9%. International growth lead the way up 21.9%, followed closely by small caps up 19.1%; large caps came in next up 16.0% with value a distant fourth, but still up a respectable 10.9%.

Real Estate – Real estate took a bit of a break in Q4 after very strong returns in Q3; overall, real estate also had a very strong 2019 with Canadian up 22.8% and international up 18.4%.

Fixed Income –Canadian bonds gained 6.9% for the year due to declining interest rates. Trez returned 7.6% as the targeted return was adjusted downwards from 8% to 7.5% due to increased hedging costs in the CAD version; the USD version still maintains an 8% target. Both Qwest Productivity Media and Cortland Credit had their best year in 2019 returning 7.7% and 6.0%, respectively. The Stewardship Alternative Income Fund was up 1.0% due to fair market estimates that were adjusted downwards on several private investments as is required by IFRS accounting standards. Gold – Gold had a good year, rising 18.9% in USD and 13.4% in CAD; the last time gold was above $1,500 USD per ounce was in April, 2013; lows were made in December, 2015 around the $1,050 USD mark.