What has surprised you most in markets so far in 2019?
Brian Belski, chief investment strategist for BMO Nesbitt Burns:
The unprecedented degree of negativity and emotional, reaction-based investing in the market has surprised us most.
This undoubtedly has been the most hated bull market ever, and, as a result, over the past 10 years, we have become somewhat accustomed to a lot of the negativity among investors. However, it has ratcheted up to another level this year. We went from analysts’ expectations implying a slight, first-quarter earnings-per-share decline earlier in the year to the market essentially pricing in a full earnings recession. We went from a mere 6-per-cent pullback within a broader 20-per-cent gain following “mid-cycle adjustment” Fed comments and U.S./China tariff sabre-rattling to many pundits calling for an imminent global economic slowdown. And most recently, we jumped from a brief intraday yield-curve inversion to forecasts for a U.S. recession before year-end.
Yet, through all of this, the S&P 500 is still up double-digit percentages year to date, and only 5 per cent to 6 per cent off all-time highs, highlighting the resiliency of U.S. stocks. With that said, we still need to be mindful that these prognostications can become self-fulfilling prophecies. Although within Canada we were certainly not expecting any significant multiple expansion back to historical averages, we do find it surprising the lack of multiple reversion given the strength of earnings to start the year. In fact, markets and analysts were largely pricing in an earnings recession to start the year. However, earnings have been continually beating upwardly revised expectations and are now up more than 8 per cent year-over-year in the second quarter. Indeed, despite the strength of the market this year, the overall negativity continues to weigh heavily on valuations and the believability of the Canadian earnings recovery.
Jennifer Radman, senior portfolio manager for Caldwell Investment Management:
A few things have stood out –
1) The divergence in how markets are valuing companies with quality, growth and defensive characteristics versus those with more cyclical exposure.
2) The continued divergence in how markets are valuing ‘new age’ versus legacy businesses, with many in the former category driven by unproven or unsustainable business models.
3) How macro concerns have overpowered strong company-specific fundamentals. This last point is particularly exciting to us as active managers as it creates interesting investment opportunities.
David Rosenberg, chief economist and strategist for Gluskin Sheff + Associates:
The biggest surprise to me was the V-shaped bounceback in the stock market from January-to-July. There’s no doubt that the major averages were woefully oversold at the lows, but the extent of the rebound on the ‘Powell pivot’ [the U.S. Federal Reserve chairman’s change in approach to monetary policy], dreams of more Chinese fiscal and monetary stimulus and the end of the trade war absolutely blew me away. Rare has a house of straw ever generated such a vigorous market response, especially considering that the onset of a three-quarter profits downturn actually began at the turn of the year.
As we’re finding out in real time, hope may buy you some time but it isn’t typically a very sound investment strategy. The bull market in equities looks to have run its course, with the squeeze on corporate profits now bumping against a compression in the price-to-earnings ratios as the elevated and rising level of global trade, political and economic uncertainty impairs the multiple that investors are now willing to pay to stay in the game.
Eric Lascelles, chief economist at RBC Global Asset Management:
Many developments in 2019 have proven unpleasant but not actually surprising, such as the advance of protectionism and the precariousness of the business cycle. In turn, the choppiness of financial markets has been par for the course, and the lack of equity-market traction makes sense. What has been surprising – and also commendable – is how abruptly major central banks have pivoted from tightening to loosening monetary policy. That, in turn, has contributed to the biggest surprise of all – how dramatically bond yields have declined. The Canadian 30-year bond yield has plummeted by half from nearly 2.6 per cent last fall to as little as 1.3 per cent in August – a record low. As the definition of a ‘normal’ bond yield falls ever lower, this has cascading implications for other asset classes.
Michele Robitaille, managing director of Guardian Capital:
The very strong rebound in markets in the first quarter of this year – which almost fully recovered the dramatic losses incurred through the last quarter of 2018 – and the fact that U.S. indices continue to flirt, on a sporadic basis, with all-time highs despite the significant uncertainty created by the U.S.-China trade dispute, growing trade protectionism, Brexit, the weakening euro zone, Iran, North Korea and numerous other macro and geopolitical risks.
Although the U.S. economy remains stable, there are clear signs of the global economy slowing and corporate earnings growth trends continue to decline markedly. Even if there was to be a positive resolution to the U.S.-China trade situation, it is unlikely at this point that the global economy would be able to regain its footing and cause growth to accelerate.
François Bourdon, Global Chief Investment Officer at Fiera Capital:
What surprised me the most so far for 2019 was the rapid drop in interest rates in Canada and the USA considering growth and inflation in North America has remained relatively solid.
Mark Schmehl, portfolio manager with Toronto-based Fidelity Investments Canada:
The latest escalation in tariffs between the U.S. and China has been the most surprising market event in 2019. I don’t think that anyone saw this round of tariffs coming, which is why market volatility has spiked. Coming out of the selloff in the fourth quarter of last year I expected the market to rip at the beginning of this year, which it did. Investors were far too concerned about the risk of a U.S. recession and anyone that sold has really lost out this year. We’ve hit another rocky patch with lots of uncertainty lately; hopefully investors don’t make the same mistake again.
What is your best advice for the rest of the year?
BMO’s Brian Belski:
It has already been a volatile past few months for U.S. stocks with trade-war concerns, Fed uncertainty and imminent recession prognostications dominating headlines. And we expect a lot of this rhetoric to continue, especially in September, which historically has been the worst month for S&P 500 price performance. So heading into the final months of the year, we would advise investors to try to maintain perspective and investment discipline, and focus on facts instead of feeding on fear, rhetoric and innuendo. Practice an active investment strategy and do not just invest in an index or a sector ETF. Specifically, we believe investors’ portfolios should have a tilt toward high-quality, positive-cash-flow companies with a focus on names that generate the majority of their revenues domestically. In addition, stable dividend payers with healthy balance sheets can help combat some of the market volatility.
Caldwell’s Jennifer Radman:
It’s really two pieces of advice aimed at protecting people from mistakes that can be very harmful to their long-term investment success. While both points are relevant in general, we think they are particularly important today given the potential for market volatility to remain elevated.
1) Make sure you won’t need to draw on the money you have invested in the market for at least three years. This positions you to avoid being forced into selling into a down market and when prices are depressed, should that scenario play out.
2) Understand what you’re invested in, know what types of companies your manager looks for – i.e., are the businesses profitable? What do the competitive environments look like? What do the growth opportunities look like? Understanding, for example, that a manager leans toward high quality businesses with attractive growth runways but which operate in more economically sensitive industries, will put you in a better position to stick with your plan even when markets go against you.
Gluskin Sheff’s David Rosenberg:
It’s all about derisking the portfolio, playing defence and having cash on hand. Liquidity at one point can be your best friend, and then suddenly become a coward. I would suggest sticking with the bonds-bullion barbell [a portfolio heavily weighted with bonds and gold], which has generated a return in excess of 20 per cent in the past year and is the most effective way to hedge against this unprecedented level of risk and uncertainty in this ever-dangerous world. Pundits will tell you to avoid Treasuries, but they don’t understand the power of convexity [the interaction between a bond’s price and its yield] at ever low levels of yield. And relative to the rest of the world, where negative yields are prevalent, Treasury notes and bonds are like the one-eyed man who is king in the land of the blind.
If you must be in the equity market, my best advice is to own what is scarce in the world today, which is growth and income. In fact, reliable dividend growth in sectors with yields better than what you can garner at the long end of the bond curve and low payout ratios in noncyclical segments have been safety-valves in these past tough few months, and I expect both to remain a refuge for investors who want a cash-flow stream and a desire to keep some toes in the risk pool.
RBC’s Eric Lascelles:
It is a cliché to claim that uncertainty is especially high, but objectively, it is the case right now. A flat yield curve and a late business cycle are classic harbingers of volatility. Consequential policy decisions are also set to be rendered over the coming months on such matters as protectionism, Brexit and Chinese stimulus. Each has the capacity to jolt markets up or down, depending on the verdict. Thoughtful analysis is thus important, but gives no guarantee of reaching the correct conclusion when so much depends upon political whim. Instead, we must operate in a world of multiple scenarios, and with careful consideration to the investment time frame.
Accept that economic growth is reasonably likely to continue in the short run, but with a higher than normal risk that it does not. Similarly, recognize that while the short-term outlook is thus glummer than usual, from a long-term standpoint equities today offer an unusually attractive risk premium over bonds. For those with a purely short-term orientation, that argues for risk-averse positioning. For those with the luxury of a purely long-term view, it suggests standing firm with a material equity overweight. For the great bulk of investors who operate somewhere between these two extremes, it means compromise – less risk appetite than over most of the past decade, but not a head-for-the-hills moment.
Guardian Capital’s Michele Robitaille:
We expect that markets will continue to be volatile for the remainder of the year as the myriad of macro and geopolitical uncertainties create significant risk to the global economic outlook. We have been gradually shifting our portfolios to a more defensive position and reducing exposure to cyclical and economically sensitive names. Although dividend-oriented and defensive sectors have had a good run, valuations remain full but not excessive, and we expect they will continue to garner fund flows in the current environment.
Fiera Capital’s François Bourdon:
My best advice for the rest of the year is to maintain a pro-cyclical bias as global central banks have cut interest rates and will continue to look for innovative ways to support the economy and markets.
Fidelity’s Mark Schmehl:
Volatility can be an investor’s friend, if you know how to manage it and wait it out. In times of heightened volatility doing less is often the better strategy. Investors can get tempted to sell on the worst days, but then miss out on great days of gains that often follow shortly after. It’s important to keep the entire picture in mind; don’t just focus on negative headlines. The U.S. economy remains strong with the Fed easing monetary policy and the U.S. consumer in good shape. There is a good case for the market to continue moving higher from here. That said, adding broad market exposure may not be prudent as some companies will fare better than others.