North American equities posted their fourth quarterly advance in a row, lifting the S&P/TSX to its best annual gain in a decade. Global equities climbed on news of a trade agreement between the U.S. and China, and on the U.S. Federal Reserve (the Fed) cutting its benchmark interest rate for the third time in 2019. As the “mini” trade deal reduced economic uncertainty and brightened prospects, oil prices climbed, bond yields surged, and yield curves steepened. Key yield curves in Canada and the U.S. that had inverted earlier in the year and sparked recession fears, un-inverted. The U.S. dollar fell against most major currencies as the Fed cut rates, while the more cautious Bank of Canada held steady. Buoyed by the narrowing spread between U.S. and Canadian rates, and by higher oil prices, the Canadian dollar strengthened versus its U.S. counterpart. As a result, Canadian dollar returns were dampened from U.S. investments, but slightly enhanced from other international markets[JE1] .
Canadian stocks lagged most other major markets as economic data slowed, and the Canadian Federal election that delivered a potentially unsteady minority government was followed by a disappointing fiscal update. Technology was the top-performing sector, led by e-commerce company Shopify Inc., and energy stocks climbed as oil prices rose. Financials underperformed as some of Canada’s largest banks reported disappointing quarterly results. The health care sector fell sharply as cannabis stocks continued under pressure. In the S&P 500, technology and health care led. Technology has been a major beneficiary of falling trade tensions. Health care stocks rebounded this quarter as liberal candidates for the Democratic Party’s U.S. presidential nomination lost traction in polls versus more moderate Democratic contenders and policy risk receded. Due to rising bond yields, the financials sector was strong and the defensive, interest-rate-sensitive utilities and real estate sectors fell.
In international equities, Europe lagged Asia, Japan trailed Asia ex-Japan, and most emerging markets were higher. Europe lagged as progress in U.S-China trade turned attention to growing tensions in U.S.-European Union trade. German and Italian stocks outperformed. The U.K. election pulled British stocks out of negative territory and Spain underperformed after the far-right VOX party made big electoral gains. Asia, which includes many economies dependent on trade with China, benefited from the de-escalation of trade tensions, and from the weakening of the U.S. dollar. Japanese stocks were lifted by the central bank adopting an easing bias and the government introducing new fiscal stimulus measures. Hong Kong equities struggled as pro-democracy protests pushed the territory into recession.
Government bond prices fell globally in the fourth quarter as yields climbed. Short duration assets outperformed long-term ones as curves steepened. Due to tightening corporate spreads, corporate bonds (corporates) outperformed government ones and, in some markets including the U.S., boosted corporates to positive returns. The period’s climb in U.S. investment-grade corporates capped their best year since 2009. As high yield spreads narrowed to their tightest in a year and lower-quality debt rallied, high yield bonds outperformed investment-grade bonds, and emerging market bonds outperformed government bonds in the U.S. and other developed markets.
The Canadian economy is entering 2020 with less momentum than its southern neighbour. But the U.S. starts the new year at a solid pace, with high consumer confidence and record levels for stock prices and house prices. Global monetary stimulus, which works with a lag of one to two years, will boost activity through the year, while lower trade uncertainty lifts business confidence. The suspension of Boeing 737 Max production will take a noticeable bite out of first-quarter U.S. growth, and U.S. politics will be a source of geopolitical risk as the year progresses, but the stage is set for better growth in 2020 than 2019. The outlooks for Europe, Japan, and China have also improved. In December the Organization for Economic Co-Operation and Development’s leading economic indicator ticked higher. The longest economic expansion on record doesn’t look close to done.