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  • Writer's picturePatricia A. Stewart | CFA


How did stocks do during the third quarter?

International stocks had a tiny .3% return in Canadian dollar terms. Canadian and U.S. stocks each rose 3%. The TSX Composite reached a record high on September 20th.

What developments affected markets?

Trade negotiations between the U.S. and China were one of the most influential factors. Stocks rose in July on optimism for trade talks after Trump and Xi met at the G20 meeting in June. In August, the announcement of new tariffs by the U.S. and retaliatory measures by China caused stocks to fall. An agreement to meet in early October then propelled stocks higher in September. Economic data added to market volatility. Statistics indicate a major slowdown is underway in the global manufacturing sector. Due to trade uncertainty and tariffs, businesses are holding off investing in machinery and equipment. As well, global vehicle sales are down with weakness concentrated in China.

In terms of sectors, which one was the winner? ... the loser?

The strongest performing group during the quarter was Utilities with a 9% return. Utilities benefitted from having attractive dividend yields in a low interest world and stable businesses when there is a recession threat. The worst performing sector was Health Care with a decline of 30%. Marijuana stocks were down due to disappointing financial results, production problems and regulatory issues.

How likely is a recession to occur in 2020?

We believe the probability of a recession next year is less than 40%.

  • While some recession indicators are indicating caution, the majority are neutral or positive. No one indicator has a perfect record of predicting recessions.

  • Weakness is concentrated in manufacturing and business investment. The consumer sector, which accounts for about 70% of the North American economy, is healthy due to low unemployment.

  • Trump wants to be re-elected. “In the last century, the only elected presidents who lost re-election did so after overseeing a recession — George H.W. Bush in 1992, Jimmy Carter in 1980 and Herbert Hoover in 1932.” Source: Bloomberg

  • Central banks have cut rates and added stimulus to the global economy. It takes awhile for the positive effects of this to show up in the data.

What is the outlook for stocks next year?

Our target for the TSX Composite in 2019 remains 17000; for 2020 we are forecasting 18,100. These targets are conservative assuming we don’t have a recession. For the S&P 500, we are estimating year end levels of 3000 and 3300. This year, profit growth has been subdued however, stocks have gained despite this. Declining interest rates have increased the valuation investors have awarded stocks. Next year, higher stock prices will be based more on earnings growth however, there is also room for valuations to rise further.

Are there risks to the forecast?

The main risk is a recession brought on by trade uncertainty, tariffs and reluctance by businesses to invest. If the consumer sector starts to slow due to increased unemployment or reduced confidence to spend, this could raise the risk of a manufacturing slowdown becoming a full blown recession.

The outcome of Brexit is still unknown and it is difficult to gauge the economic impact of the U.K. leaving the EU without a deal. This uncertainty could further dampen business investment in Europe.

Iran is retaliating against the economic sanctions imposed by the U.S. So far, action in the Strait of Hormuz and the attack on Saudi oil production facilities have not caused a lasting spike in the oil price. Should war break out or Iran cause more severe damage to Middle East oil supplies, a high oil price would further weaken economic growth.

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