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If U.S. President Donald Trump makes good on his threat to impose tariffs on an additional US$300-billion of Chinese imports, it’s going to be an ugly start to July trading.DAMIR SAGOLJ/Reuters

That may have been the stock market’s best first-half performance in a decade, but it didn’t really feel like it.

While the S&P/TSX Composite Index posted nearly a 16 per cent total return, much of the upside was driven by a simple rebound from last fall’s correction, which itself was widely seen as an overreaction.

Meanwhile, the economic fallout from the U.S.’s multifaceted trade war cast a pall over the first half and continues to darken the outlook through the rest of the year.

“Normally, when you see markets up this much, people are rather enthusiastic,” said David Sykes, head of TD Asset Management’s fundamental equities team. “But there’s still this massive level of uncertainty.”

Despite North American indexes sitting close to record highs, economic readings increasingly suggest the global economy is slowing. And the market is just one round of tariffs away from losing its composure altogether.

Trade disputes dominate the agenda at this weekend’s G20 summit in Osaka, Japan, which will likely set the tone for financial markets when trading resumes next week.

For what else investors might expect in the remainder of the year, we look at the big themes from an eventful first half.

Goldilocks economy

Over the past decade, the bull market has been at its most potent when the economy is growing at a moderate pace – not so fast as to force central bankers into tightening mode, and not so slow as to suggest a recession is imminent. And that’s mostly what investors got in the first half. While the global economy lost considerable momentum in the spring, most leading indicators did not deteriorate to the point of forecasting a contraction.

“So is this just yet another midcycle slow down? It really depends on government policy,” said Philip Petursson, chief investment strategist at Manulife Investments. A U.S.-China agreement, or even just a de-escalation of tensions, would bode well for stocks through the summer. But, if Mr. Trump makes good on his threat to impose tariffs on an additional US$300-billion of Chinese imports, it’s going to be an ugly start to July trading.

Central banks turn dovish

Last October, after raising interest rates for the third time last year, U.S. Federal Reserve Chairman Jerome Powell said the U.S. economy could hum along “indefinitely.” Those comments marked the turning point for both U.S. and Canadian stocks, as the fear grew that the Fed would hike straight into a downturn. As markets went aggressively into bear mode, Mr. Powell had an abrupt change of heart, saying in November that interest rates were close to where they needed to be. “I’ve been doing this for about 20 years, and I have not seen such a big reversal by the Fed in such a short period of time,” Mr. Sykes said.

By December, Bank of Canada Governor Stephen Poloz also hit pause on the rate-hike path. The central banker’s about-face set the stage for a global upswing in stocks, with nearly every major developed market advancing by double digits in the first half. Looking ahead, the futures market is currently betting with 100 per cent certainty that the Fed’s next move will be a cut.

Stocks and bonds harmonize

The relationship between stocks and bonds has evolved over the years, but they mostly move in opposite directions. Stock prices tend to decline when investors are more risk averse, as the shift to safety pushes up bond prices, and vice versa. This year, the two asset classes are sending conflicting messages. The 18-per-cent gain in the S&P 500 projects confidence in the broader economy, while a year-to-date decline of five-year treasuries to 1.76 per cent from 2.51 per cent suggests bond investors are focused on economic risks. Similarly, five-year Government of Canada bonds have declined to 1.39 per cent from 1.89 per cent. “I think the tug-of-war will be answered in the second half of the year, one way or the other,” Mr. Sykes said.

Biggest winners – gold has its moment

Long-suffering gold bugs have seen the commodity recently break through the US$1,400-per-ounce mark for the first time since 2013. Periods of heightened economic uncertainty tend to see higher demand for gold as an asset. The metal also typically benefits from a weak U.S. dollar and the U.S. dollar has dipped recently on expected rate cuts. As a result, the top 10 performing stocks in the S&P/TSX Composite Index so far this year include seven gold mining companies, who have seen their shares rise by between 50 and 90 per cent. A bull market in gold equities could still have plenty of room to run, says Martin Roberge, a portfolio strategist at Canaccord Genuity, with the next phase likely being driven by inflation and recession fears.

Biggest losers – the oil patch, yet again

Even good news has little effect on the oil patch these days, particularly for midcap stocks. For most of 2019, the global oil market has been reasonably well balanced, with West Texas Intermediate averaging about US$57 a barrel in the first half – an improvement over most of the past five years. And although the Trans Mountain pipeline expansion still faces many hurdles, the federal government’s approval of the project is a clear positive for the sector. Still, it has been a brutal year for smaller oil and gas names, which account for five of the worst performing S&P/TSX Composite Index stocks. “There are some well-run businesses, great management teams, good balance sheets and world-class assets,” said Jennifer Stevenson, a portfolio manager at Dynamic Funds. “But they just can’t generate any interest in a market that’s having difficulty with the sector in general, and with Canada specifically.”

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