Market Watch - January 4, 2019

By Scotia Wealth Management - The Zukiwsky Group (Sponsored)
January 4, 2019 - 10:46am

 

Investors Bracing for More Volatility as Chinese Economy Slows

Investors were understandably eager this week to bid farewell to 2018. In Canada, the TSX was down nearly 12% for the year, while the loonie declined almost 8%, its worst performance in three years, as oil prices plummeted and expectations faded for more rate hikes in 2019 from the Bank of Canada. The year’s numbers in the U.S. were also disappointing: The Dow fell 5.6%; the S&P 500 was down 6.2%; and the Nasdaq was off 4%. It was the worst year for stocks since 2008.

December was especially brutal: The S&P 500 was down 9%, and the Dow shed 8.7% — the worst December since 1931. In one seven-day stretch, the Dow fell by 350 points or more six times. For the S&P, the only sectors to finish higher for the year were healthcare and utilities. Energy, materials, communication services, industrials and financials were the biggest percentage losers of 2018, down between 14.7% and 20.5% from the year’s start. While markets registered slight gains Wednesday over hopes of a trade truce between the U.S. and China, volatility reared its ugly head again on Thursday as the Chinese economy exhibited clear signs of weakness. China's official purchasing manager’s index fell in December to a two-year low. Just as troubling was news Thursday that Apple had slashed its quarterly revenue forecast for the first time in more than 15 years, citing a sales downturn of iPhones in China. The news from Europe wasn’t much better as eurozone manufacturing activity dropped for the fifth month – barely avoiding contraction – while U.S. factory activity also slowed in December, in light of waning demand. By day’s end, it was another day of red numbers, as the Dow plummeted 660 points, the TSX shed 81, while the S&P and Nasdaq tumbled 2.5% and 3%, respectively.

Fears of Global Slowdown Weigh on Markets

For the three trading days covered in this report, the Dow dropped 376 points to close at 22,686, the S&P 500 declined 38 points to settle at 2,448, while the tech-heavy Nasdaq shed 391 points to close at 6,464. In Canada, the TSX was down 9 points to end at 14,213.

Equities

We continue to recommend modest overweight exposure to equities relative to our long-term, strategic asset allocation model. We recognize the maturity of the business cycle and the potential for more policy interest rate hikes in 2019 by major central banks. We also remain mindful of other risks, including U.S.-China trade tensions, rising input costs, and U.S. dollar strength. That said, we expect U.S. corporate earnings to continue growing next year, potentially in the upper-single digit percentage range should consensus forecasts pan out. Given the maturity of the current business cycle, we have tactically reduced the economic sensitivity of our equity guided portfolios by trimming exposure to the semiconductor and automotive industries. We maintain our belief that the best way to invest in emerging markets is through well-capitalized multinationals domiciled in advanced economies.

(Bill Curry)

 

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