By ScotiaWealth - The Zukiwsky Group (Sponsored)

Market Watch – Oct. 19, 2018

Oct 19, 2018 | 4:09 PM

U.S. Stocks Plunge Over Saudi Tensions, Global Growth Concerns

U.S. stocks fell sharply Thursday as fresh declines in technology shares dragged major indexes lower over concerns of slowing global growth, geopolitical tensions and rising U.S. Treasury yields. U.S. declines accelerated midday Thursday after Treasury Secretary Steven Mnuchin announced his withdrawal from an investment conference in Saudi Arabia amid mounting speculation that the kingdom may be involved in the disappearance and suspected death of dissident journalist Jamal Khashoggi. The S&P 500’s utilities and real estate sectors, a favorite with jittery investors for their sizable dividends, both registered gains.

Fueling concerns over waning growth, China’s benchmark stock index skidded to four-year lows on Thursday. Chinese equities were pummeled, with the nation’s premier warning that the economy could struggle, amid worries over the impact of an escalating tariff war with the U.S. China’s benchmark Shanghai Composite Index surrendered as much as 2.6%. Meanwhile in Europe, worries over the lack of progress in Brexit talks and Italy’s budget plans also contributed to negative sentiment. In Canada, many cannabis stocks hit all-time highs Tuesday, the day before legalization, then fell sharply in early trading Wednesday, dragging the health care sector down. But most stocks clawed their way back, finishing the trading day down just slightly.

Turning to oil, Brent crude fell below the $80-a-barrel threshold for the first time in nearly a month on Thursday, after data showed an unexpected rise in U.S. inventories. In late Thursday trading, oil had fallen to the $68 mark. Prices have come under pressure over the past week, amid global market turmoil, U.S. surpluses and signs of slowing demand.

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Global Concerns Fueling Volatility

For the four days covered in this report, the Dow added 39 points, despite falling over 300 points Thursday, to close at 25,379, the S&P 500 inched up 2 points to settle at 2,769, while the tech-heavy Nasdaq dropped 12 points to close at 7,485. In Canada, the TSX surrendered 10 points to end at 15,404.

Equities/Strategy

Strategy

Financial market volatility has increased over the past several weeks, and we expect this behaviour to persist as the business cycle matures. Against this backdrop, we revisit some of our expectations and recommendations. To begin, we believe diversification, across asset classes and geographies, mitigates risk. Increased volatility and equity market selloffs can offer tremendous buying opportunities, provided an investor is patient, long-term focused, and sufficiently well-diversified to benefit from them. Secondly, we expect economic growth to eventually stall or decelerate after having steadily increased since the global financial crisis. Diminishing economic slack and rising costs will force companies to increase prices in order to sustain margins, but those higher prices will eventually erode demand. Third, we note sentiment and fundamentals often diverge. Premature expectations of a slowdown in the breadth and pace of economic growth, alongside tariff-related concerns, have recently tainted investor sentiment. The VIX Index, which is often referred to as a fear barometer, has almost doubled during the past few months. However, neither the VIX Index nor our fundamental analysis necessarily implies the equity market will decline. Finally, we believe near-term fundamentals remain strong. Our inflation and recession forecast models indicate that the U.S. and global economies will be able to trudge along through gradually tightening financial conditions. While our tactical asset allocation continues to favor equities, we intend to gradually increase our exposure to non-correlated asset classes and reduce our equity weighting as the probability of economic recession increases.

(Big Picture – Bill Curry)

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