A positive quarter around the globe and some indication of economic easing make this a time to not fight the fed, as they say.
Global equities made gains in the quarter. Stocks in both Canada and the U.S. finished near all-time highs. April began with the first quarter rally continuing, mostly based on the expectation that the U.S. Federal Reserve (the Fed) would lower interest rates this year. Increased trade tensions between the U.S. and China triggered a steep decline in May that reversed after the Fed strongly hinted it would lower interest rates in July. Growth worries boosted gold to a six-year high, and pressured oil prices lower most of the quarter until rising tensions in the Persian Gulf in late June gave them a lift.
In Canada, the technology sector led on the upside, driven by shares of Shopify. Industrials also made strong gains, and surging gold prices lifted the materials sector. Energy put in the worst performance among major sectors due to lower oil prices for most of the period. Health care saw the biggest absolute drop as cannabis stocks were hurt by supply constraints and a slow retail rollout. Communication services stocks fell after Rogers and Bell introduced new wireless plans that ratchet up pricing pressures in the industry. In the S&P 500, energy was the only sector to decline for the quarter. Health care lagged as political campaigning got underway. U.S. health companies face challenges from both Democrat and Republican proposals going into the 2020 election campaign. The financials sector was especially strong following robust Q1 earnings reports. The technology, materials, and consumer discretionary sectors were also among the strongest contributors to S&P 500 gains.
Most European markets made gains. German stocks led performance as the European Central Bank joined the Fed in suggesting rate cuts were on the table if growth weakened. Among major markets, Spain was weakest, after an election resulted in a larger parliamentary presence for the far-right VOX party. Weaker economic data in China challenged most Asian markets, especially Hong Kong. Export-dependent Japan also struggled but was buoyed by the Bank of Japan promising to maintain its accommodative policy stance. Australia bucked the regional trend as the market-friendly incumbent government was unexpectedly returned to power in national elections, giving equities a boost.
Global bond prices climbed as yields declined. Both the Fed and the Bank of Canada kept their key interest rates steady. None the less, by late in the quarter, due to concerns about the global economy heightened by trade hostilities, yields on 10-year U.S. treasuries slipped below 2.00% for the first time since 2016 and Government of Canada 10-year yields touched a 2-year low of 1.40%. Yields in Europe and Japan, already negative, fell further to multi-year lows. Since yields in these regions had less room for retreat, European and Japanese bonds underperformed those in the U.S. Several key yield curves inverted, a condition widely thought to signal potential economic decline. The Fed responded by embracing the case for “insurance cuts” and hinting it would soon lower rates. The resulting increase in rate cut expectations helped steepen yield curves and stabilize markets.
Investors have lots to worry about, including trade wars, inverted yield curves, geopolitical concerns, and slowing global growth. In particular, an intensification of the trade war could cause a slowdown in the second half of 2019. But there does not appear to be a significant risk of recession any time soon. In the U.S., confidence is high, the labour market robust, and inflation, not a problem. Yield curve inversions have not persisted long yet enough to truly signal recession, and an expected cut by the Fed in July should flip curves positive. China’s economy is starting to show signs of responding to massive stimulus. That alone will create a strong tailwind for global growth. Most importantly, we appear to be in the early phase of a global central bank easing cycle, bringing to mind the adage “Don’t fight the Fed,” as lower interest rates may ignite economic activity.