Fourth Quarter 2018

For investors, 2018 came to a merciful close on December 31st. With increasing volatility stalking the equity markets throughout the month of December, it ended with the worst performing year since the financial crisis of 2008-2009. Negative returns were delivered by both the S&P 500 (- 4.4%) and the TSX Index (- 8.9%), in their respective currencies. It marked yet another year in the past decade that the Canadian equity market significantly under-performed its American counterpart. In addition, the relative under-performance of Canada’s resource based economy drove the continued weakness of the Loonie.

We currently find ourselves in a confounding period, whereby political volatility is paired with a sound economic scenario, both in North America and beyond.  During 2018, the United States experienced its strongest GDP growth rate in a decade, driven, in part, by the unneeded stimulus of tax cuts. In fact, economic growth continued throughout the world, albeit at a slowing pace. An important point of concern has been the slowing rate of growth in China. While this has been expected for some time, it now appears to have materialized. Nonetheless, China continues to grow at about 5%, down from its previous pace of over 7% for many years.

The most concerning factor on our radar screen is the increasing instability of the White House leadership and the unpredictable behaviour of President Donald Trump. Over the past two years, this scenario has resulted in the unprecedented combination of poor leadership overshadowing a strengthening domestic economy.  In our view, Mr. Trump has a shaky understanding of how macroeconomics works, and does not appreciate the benefits of global free trade. His “zero-sum” concept of global trade, whereby one can only benefit at the expense of another, is unsophisticated, damaging and wrong. However, we do agree that he may have a point in insisting that the Chinese should “play fair”, particularly in respect to intellectual property and market access.

The other element that is spooking equity markets is the gradual, but well communicated, efforts of the Federal Reserve to increase interest rates back into a range that would be part of a more normal economic environment. Without any real inflation threats on the horizon, a return to normalized interest rates is a key signal that economic growth is robust enough to handle it.

The combination of ineffective U.S. political leadership and rising rates has created upheaval in the financial markets. This uncertainty has resulted in volatile daily price swings as investors promptly punish the share prices of companies showing any signs of corporate under-performance.

Our strategy currently favours holding an elevated level of cash in your portfolio. We cannot predict with any certainty that the U.S. political scenario will stabilize anytime soon. What we can do is continue to monitor the macroeconomic environment that we operate in, and carefully scrutinize the ongoing fundamentals of the companies that we either own or are thinking of buying. Ultimately, economic growth leading to expanding revenues, earnings and cash flows of publicly traded companies will drive stock market performance. We will continue to manage your portfolios carefully as we navigate through this unusual environment.

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