Local news delivered daily to your email inbox. Subscribe for FREE to the rdnewsNOW newsletter.

Market Watch – December 21, 2018

Dec 21, 2018 | 11:13 AM

Hopes For Santa Claus Rally Fade as Fed Announcement Disappoints

Investors counting on a more dovish stance from the Fed were largely disappointed Wednesday as the central bank proceeded with another 25-basis-point hike, while signalling a somewhat milder path of increases for 2019. Major indexes headed south following the Fed’s announcement and then fell even further during Fed Chair Jerome Powell’s remarks, with the Dow swinging nearly 900 points over the day`s trading session. The tech-heavy Nasdaq also took the news hard, dropping 147 points for the day, while the TSX surrendered 153.

It’s been a rough week so far for North American markets. Major indexes opened somewhat lower Monday and began a steady descent around midday. By day`s end, the Dow had dropped 508 points to its lowest level of the year, while the Russell 2000 small-cap index entered bear-market territory. Although markets were slightly higher Tuesday, the downward slide resumed Wednesday and Thursday, as pessimism over global growth prospects and tumbling oil prices continued to weigh on markets. In late trading Thursday, the Nasdaq was perilously close to bear-market territory, while 10 of 11 sectors in the S&P 500 were down, led by losses in energy, tech and consumer discretionary. U.S. stocks are now off to their roughest December start since 1980.

Oil prices fell more than 4% on Thursday, hitting their lowest mark in 15 months on worries about oversupply and waning energy demand. Meanwhile the loonie on Thursday touched its lowest level since June 2017, trading just above 74 cents.

Markets

Markets Continue December Slide For the four days covered in this report, the Dow dropped 1,241 points to close at 22,860, the S&P 500 declined 133 points to settle at 2,467, while the tech-heavy Nasdaq plunged 383 points to close at 6,528. In Canada, the TSX surrendered 453 points to end at 14,142.

Equities/Strategy

Strategy

Fundamentals overshadowed in recent equity market sell-off. We acknowledge financial conditions (including monetary policy and bank lending standards) are tightening, global trade tensions are likely to persist, and the U.S. tax cut tailwinds of 2018 will not repeat. However, these factors, even in combination, should not spell the end of economic or earnings growth (the key driver of stock returns) in 2019. We expect slower growth and more muted equity market returns, but at this juncture we do not foresee a recession occurring in 2019. We think sentiment played a leading role in the equity market sell-off that followed this week’s U.S. Federal Open Market Committee (FOMC) decision, and we anticipate similar bouts of volatility to characterize 2019 financial markets. Portfolio diversification is the first and most important step in managing money in such an environment. We also counsel investment in issuers that generate substantial free cash flow and have sustainable competitive advantages, clean balance sheets and, ideally, exposure to secular growth themes. Our asset allocation is underscored by a modest overweight in equities with a strong bias toward developed versus emerging market issuers. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI Emerging Markets Index by ~9%. Moreover, fixed income exposure within our recommended asset allocation is limited to investment grade government and corporate issuers, which have outperformed high-yield securities by ~4% on a year-to-date basis in the United States.

(Big Picture – Bill Curry)

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.