The New Year began the same way the old one ended: volatile stock markets, the U.S. government in partial shutdown, Canadian energy policy in disarray, tariffs on our steel and aluminum exports to the States still in place.
So, nothing new. The question is not how the year will start but how it will end up.
This is the time when I normally offer my predictions for the coming year. But here’s the problem. Forecasts are problematic at the best of times, but at least they have some basis in reality by analyzing trend lines and making reasonable assumptions about where they are heading.
Unfortunately, right now the only predictable patterns are volatility and uncertainty. Every forecast I have read about the markets in 2019 is based on a number of assumptions that may, or may not, come to pass. If they don’t, the whole scenario collapses.
That’s why some economists are forecasting a rebound in the markets for the year ahead while others are saying stocks will be lower a year from now than they are today. It all depends on which assumptions you rely on.
Recently, a reader chastised me for focusing too much on political developments and urged me to stick to the markets. I wish that were possible but the two are intricately intertwined. One man, U.S. President Donald Trump, can dramatically shift market direction with a single tweet. It’s impossible, and foolhardy, to ignore that reality.
Given the uncertainty we face, I am going to confine myself to only two predictions for 2019.
The TSX will outperform the S&P
The Toronto Stock Exchange had a terrible year in 2018, losing 11.6 per cent. I don’t expect 2019 will be as bad. We may see some recovery in the energy sector after a miserable 2018, which saw the S&P/TSX Capped Energy Index fall by almost 29 per cent. Even a break-even year would be a plus by comparison. We may also see a better performance from the largest TSX sector, financials, which lost 12.5 per cent last year.
This is not to say that the TSX will end the year in the black. If we do, it will likely only be a single-digit gain. But we should do better than the S&P 500.
U.S. stocks will not be getting the huge boost that was provided by Mr. Trump’s corporate-tax cuts, which came into force at the start of last year. These inflated net earnings across the board, which in turn deceived investors into believing corporate profits were actually better than they were. This year we’ll see a return to reality as the one-time impact of the cuts vanishes.
Better performance by Canadian stocks is something I have rarely suggested in recent years.
Bonds will do better
I expect the bond market to fare a little better this year as the pace of interest rate increases slows in both Canada and the United States in the face of a softening economy and global trade disputes. It may come as a surprise that the FTSE Russell Canadian Universe Bond Index actually finished 2018 in the black, up 1.41 per cent on the year after a strong finish in December. That was 13 percentage points better than the TSX.
That’s about as far as I’m prepared to go at this point in forecasting 2019. Once we get answers to some of the key question marks overhanging us, I’ll have a better feel about where we’re going. In the meantime, stay defensive with your portfolio.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.