June 2019 Portfolio Management Team Update

Elvis Picardo

June 7, 2019

Market & Economic Environment: The global equity rally that had taken North American indices to new highs in April came to a shuddering halt in May, as a couple of unexpected tariff-related tweets from President Trump shattered market calm and investor complacency. On May 5, Trump tweeted that tariffs would rise on goods from China, reigniting fears about a protracted and damaging trade war between the two largest economies. On May 30, Trump tweeted that escalating tariffs would be imposed on all imports from Mexico starting June 10 if the nation did not take steps to curb the influx of illegal migrants into the US. These negative developments resulted in investors rotating out of risk assets such as equities and commodities, and into safe havens like US Treasuries. The TSX Composite declined 3.3% in the month, led by the Health Care (-13.8%), Consumer Discretionary (-8.7%) and Financials (-5.1%) groups, while the Energy sector tumbled 5% and Materials fell 4.5%. Information Technology (+4.3%) was the best-performing sector on the TSX, while defensive groups like Utilities (+2.9%) and Consumer Staples (+2.7%) also outperformed. US indices recorded their worst monthly performance of 2019, as the S&P 500 slumped 6.6% and the Nasdaq Composite plunged 7.9%; the Dow Jones Industrial Average declined 6.7% last month after falling for six straight weeks in its longest slump since 2011. (Data Source: FactSet)

Our Strategy: With trade tensions having resurfaced as the biggest concern for investors, a side-effect of the recent “flight to safety” trade that has depressed longer-term yields around the world is that yield curves in the US and Canada are currently at their most inverted since 2007. Such yield curve inversion is stirring speculation that the global economic cycle may have peaked, and a recession could be around the corner. While traders are now pricing in two rate cuts by the Federal Reserve this year, the Bank of Canada signaled on May 29 that it is no rush to lower interest rates as it remains confident in the Canadian economy’s ongoing rebound from its recent soft patch. The Portfolio Management Team (PMT) believes that rising market volatility, a consequence of the deteriorating global macroeconomic environment, could give rise to buying opportunities in the weeks ahead. The PMT also continues to monitor index levels closely, as portfolio rebalances will be initiated if key support levels for the TSX Composite and S&P 500 are breached.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.