Crude oil (West Texas Intermediate)
This year’s swift downturn in oil prices caught everyone off guard. Through the first three quarters of the year, U.S. and European crude benchmarks were on a steady upward trajectory. The global economic outlook was good enough to provide support on the demand side, while political turmoil in Venezuela and looming sanctions against Iran resulted in a supply gap. By the spring, traders and analysts began to speculate about the prospects of West Texas Intermediate rising to US$100 a barrel for the first time since 2014, and by the fall, that started to look possible as crude topped the US$75 mark. Then the supply-demand balance shifted dramatically. The United States softened its approach with Iran, global production spiked and the escalating trade war between the world’s two largest economies, the United States and China, stoked fears that global growth would suffer. Starting in late October, WTI futures fell for a record 12 straight trading sessions – part of a 40-per-cent slide that continued through the end of the year. Several strategists anticipate a more constructive backdrop for oil in 2019, although the outlook is highly dependent on a shifting economic, trade and monetary policy landscape.
Canadian dollar (CAD-USD)
The loonie didn’t have a chance this year. Two major drivers of the Canadian dollar – the price of Alberta crude oil and Canadian short-term bond yields against U.S. comparables – deteriorated to levels not seen since January, 2016, when the global oil recession hit its depths. The story behind Canadian oil is by now painfully familiar – the lack of pipeline supply combined with soaring oil sands production crushed the price of domestic crude to as low as US$13.46 a barrel in November. Bond yield spreads, meanwhile, widened as the Bank of Canada was forced into a more dovish position, in large part because of the carnage in the oil patch. Those twin anchors dragged down the value of the Canadian dollar by nearly 8 US cents from a peak in early February. But it could have been worse. When conditions were similar three years ago, the loonie dropped to as low as 69 US cents, compared with about 73 US cents today. Why the resilience? Stéfane Marion, chief economist and strategist at National Bank Financial, suggested it’s because the economic outlook is more positive now, while investors might also be expecting the weakness in Western Canadian Select prices to be temporary. If they’re right on both counts, the Canadian dollar could be due for some appreciation in the new year, especially if the U.S. Federal Reserve takes a pause in hiking rates.
U.S. tech stocks (Nasdaq Composite Index)
The second half of the year served as a remedial lesson in gravity. By midyear, the superhyped FAANG stocks – Facebook, Amazon.com, Apple, Netflix and Google parent Alphabet – had reached the stratosphere, bestowing the world’s first US$1-trillion public valuation on Apple. As a group, their stocks were up by more than 60 per cent over the prior 12 months, leading the gains at the heart of the bull market. The same stocks were also the focus of the sell-off, posting an average decline of more than 35 per cent from their peak in June through the end of the year, and dragging the broader Nasdaq Composite Index into bear market territory. Beyond a reversion of the market’s biggest winners, the Big Tech narrative has also been tainted by Facebook’s string of data-privacy controversies, as well as concerns that demand for Apple’s iPhones may have peaked. It’s difficult to find any consensus on the outlook for tech stocks going into the New Year. While valuations have improved, the earnings outlook is clouded by growing concerns for the economy.
Commodities (Bloomberg Commodities Index)
Energy hogged the spotlight this year, but for other commodities, almost all other commodities in fact, it was an absurdly bad year. Here is a list – by no means exhaustive – of the commodities in negative territory on the year: most precious metals, including gold, silver and platinum; every major base metal, from aluminum to copper to zinc to tin; and a range of agricultural commodities, including soybeans, coffee and sugar. This kind of synchronized decline in financial assets is most often accompanied by something like a recession in a major economy. “There has been no financial meltdown, no large sovereign or corporate has defaulted, and earnings growth has been decent. What gives?” Barclays strategists said in a 2019 outlook. The metals sell-off appears macro driven, with investors retreating from markets as global trade tensions escalated, threatening to put a dent in global growth. Many strategists see decent demand-supply dynamics for several important commodities in the year ahead, although a reignition of the trade war could quickly wipe out any improvement in sentiment.
Canadian banks (S&P/TSX Composite Diversified Banks Sub-Industry Index)
The Big Six banks just had their worst calendar year since the financial crisis. The current losses are nowhere near as severe, of course, with the group down by almost 11 per cent this year, compared with 34 per cent in 2008. But any bad year for the banks is rare enough to be conspicuous. The performance of the bank stocks this year reinforced the importance of the energy sector to Canadian equities. In 2018, as in 2014, a downdraft in big bank stocks coincided with hard times falling on the energy sector. In addition, sentiment toward Canadian financials was further affected by trade friction between the United States and Canada, the correction in the housing market, and concerns over indebted households. And yet, the sector continues to churn out immense profits, with the Big Six generating a total of $45.3-billion in earnings in the 2018 fiscal year. For next year, there is not yet any reason to expect the banks won’t continue to deliver on earnings and dividend growth.
Tim Shufelt