The above phrase, used by Philip Petursson, Chief Investment Strategist for Manulife Investments, following the Economic Club of Canada’s annual breakfast meeting, sums up the 2019 economic view.
2018 turned negative despite positive prevailing economic factors such as a strong job market, positive global GDP and stable inflation. Canada’s population growth in 2018 of approximately 525,000, the most since the 1950’s due mostly to immigration strength contributed positively to job growth and housing markets. Stefane Marion, chief economist at National Bank called Canada “OECD’s most successful talent poacher, which bodes well for a knowledge economy whose jobs have a strong multiplier effect [greater than manufacturing].”
Despite positive economic factors, risks both real and perceived that pushed into 2018 continue to influence 2019. It is often said that politicians get too much credit for is what is happening in the economy. Disruptive policies though are where government administrations can have economic impact. A lot of uncertainty has materialized around US trade policy or perhaps to put a finer edge on it, how it is being communicated. The threat to Canada is real. Picture the two largest economies at odds over trade. The US is Canada’s largest trading partner and China is the world’s largest importer of raw materials. Where does that put Canada?
Other common factors late in the economic cycle such as rising interest rates, declining housing starts, and softening confidence indicators are present. These point to increased risk of recession in 2020 and perhaps sooner if an unexpected shock occurs. The economist’ consensus saw domestic and global GDP [gross domestic product translates to report card grade for economies], declining but not negative for 2019.
The market is a good barometer of future expectations. That said, the sharp decline in the last quarter of 2018 took stock valuations lower than the data suggested. Market corrections are not known for precision and will often swing past reasonable valuations in both directions. While volatility continues, the pendulum is expected to swing back positively towards price recovery in 2019. Simply put the market over reacted to the negative. Just don’t expect a banner year.
The overarching theme though is that recession, a natural economic pause, is coming. No comments were made on depth or breadth and there is no reason to believe it will be anything more than a normal pause. The growth assets and momentum plays that have carried the markets to new heights will give way to companies and assets with stable earnings and generally reasonably priced. Value investing should be the new vogue. As with any recession remember when you get up in the morning you still turn the lights on, prepare breakfast and get on the road to work. A lot of things happen to allow you to do that and recession does not diminish that activity. Consider holding assets that represent economic essentials regardless of whether the economy is booming or not.
As always, we are happy to discuss how your asset allocation will work for you to continue to build wealth.
~ Cam Leith
This publication is solely the work of Cam Leith for the private information of his clients. Although the author is a Manulife Securities Advisor, he is not a financial analyst at Manulife Securities Incorporated (“Manulife Securities”). This is not an official publication of Manulife Securities. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Securities. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Securities or any other person as to its accuracy, completeness or correctness.