Your market review

2017 has been encouraging. The largest economy in the world, the United States, has found its alluring energy and great exporting powers such as the euro zone and Japan are about to register a greater than their long term potential growth thanks to an increase in world trade. The emerging economies have also grown faster than the year before.

In turn, the majority of the great markets have reached record heights.  Will this favorable context continue? Should we expect a correction? What should we do?

Stock Markets

Canadian market

All of the S&P/TSX sectors, with the exception of energy, have posted positive returns in 2017.

The index is now trading at more than 16,350 points.

The economic context has contributed in pushing Canadian stocks to new heights, particularly during the last four months of the year.

American market

It is entering its 122th month of growth since the previous peak before the last recession.

The S&P 500 has also reached a record high, now at more than 2,730 points.

International markets

The MSCI index all countries has reached an absolute record in 2017 and is now trading a more than 2,080 points.

 

The Economy

Canada

In 2017, we have seen an increase in wages, job creation has been excellent and the interest rates are still unusually low.

Economic indicators are positives for 2018. They tend to show the start of an overheating in the economy. Markets expect an increase in interest rates and we think that they will increase faster than anticipated.

This creates a risk. The low interest rates of the last 10 years have created a monster. Canadian household’s debt has increased to never before seen levels. Real Estate prices have doubled in the last 12 years.

Demand for raw materials should increase in 2018 because if the strong world economy growth. This should create an upward pressure on the Canadian dollar ($CAD) which will decrease the competitiveness of Canadian exporters.

NAFTA negotiations with the Trump government are also bringing uncertainty in 2018 for the Canadian economy. The link between the Canadian and US economies are still all too real in 2018.

We think the economy will grow in 2018 but most likely less than projections are showing.

 

United States

The job market has had its best performance since 2006. Consumer confidence and business confidence are high. Consuming has stayed firm according to October retail numbers which show a resilience in spending.

We can expect a new year of greater than anticipated growth in 2018 partly due to tax cuts. The Federal Reserve is more and more preoccupied by the long term inflationary risks. As such, we believe that it will tighten more than the markets currently expect.

However, the NAFTA negotiations could endanger up to 9 million jobs directly related to this accord.

 

Euro zone and Asia

The world economy has had a good year. The world GDP growth for 2017 should be the best in 6 years with historical records on the front page almost every week and more than 9 years without a correction of more than 20%, it is easy to believe that these gains are exaggerated.

The economic renaissance of the euro zone coincides with an acceleration of the debt growth. Household debt is now increasing at an annual rate of more than 3% more than ever since 2011, while business debt is also increasing vigorously. Stimulation measures form the European central bank seem to bear fruits but a tightening of its monetary policy would be premature.

Japan is profiting from the increase in world trade. Its GDP growth in 2017 could come close to 1.5% which would be the best in four years. The job market is at its highest in a generation, the jobless rate is inferior to 3%.

China’s economy has exceeded expectations with a growth of about 6.8% this year. Budget stimulus has played a role in this increase but consumer spending was also resilient. With the strength of interior demand, the imports have even grown faster than the exports.

Emerging economies has developed faster than the year before, carried by trade and stimulating policies. These policies could come to an end at the end of 2018 which could slow the economic growth down for this year.

 

In brief

In  Canada

Economic indicators are encouraging for the year to come. However, an increase in interest rates superior to what the market anticipates, NAFTA negotiations without a positive outcome for Canada and the Trump factor are creating uncertainty.

United States

The majority of good news for the United States such as the encouraging economic indicators and the tax cuts are already reflected in the stock prices. The NAFTA negotiations as well as the Trump effect are elements of uncertainty that could negatively affect the US economy.

World

Even though central banks and governments could decide to reduce their interventions, we believe that, all in all, growth should be there in 2018.  

My asset allocation

Fixed income

Fixed income products seem to be coming back to their primary roles that is to protect capital as opposed to generate important yields in traditional asset allocation.

Since we anticipate interest rate increases in 2018, we suggest to keep a shorter term length than the reference index (less than 4 years). Furthermore, we prefer positions with a good credit rating even if that decreases interest revenues.

 

In my opinion, we are heading more and more towards the last stages of the current stock market cycle.

Although the market participants are showing a high level of optimism with high market evaluations and an historically low volatility, we recommend a more prudent approach. When expectations are high as is currently the case, a disappointment or a bad surprise can have a pronounced impact on stock markets.

If we a measure a cycle in terms of the number of quarters between recession, the current cycle is actually the second longest in history, equal to the 1960s with 35 quarters but still below the record period of the 1990s.

For this reason, we continue to gradually reduce the stock weight in our client’s portfolios, starting with the US and then Canada.

Our strategy is to secure profits generated in the last 8 years and accumulate amounts that we can easily use to buy stocks during a context of a market correction or more attractive prices. It is actually quite rare to find discounts in the market currently.

I hope you appreciated my newsletter. Do not hesitate to contact me at cathy.duval@bnc.ca if you would like to discuss it further together. I take his opportunity to wish you a great 2018 New Year!

 

Disclaimer: The opinions expressed herein do not necessarily reflect those of National Bank Financial. . The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). National Bank Financial is a member of the Canadian Investor Protection Fund (C.I.P.F).