The world we live in today often sensationalizes the average news story. And so it is more likely than not that our clients are at least hearing about the volatility that has returned to the markets in 2018 and the “correction” that has taken place thus far (though, with the exception of Canada, some of the major global equity markets haven’t fared too badly year-to-date).

 

YTD Performance in Canadian dollars (as of yesterday’s close):

• S&P/TSX: -6.3%
• S&P 500: -1.1%
• Euro Stoxx 50: -2.4%
• Nikkei 225: +1.7%
• MSCI Emerging Markets: +3.4%

 

While we acknowledge that the threat of trade wars – the most recent volatility-inducing development – is cause for concern, we believe it is easy to lose sign of the fundamental backdrop for equity markets, which remain favorable for now, in our view. Here are a few of the key messages we continue to focus on:

• Solid global economic growth in virtually most key parts of the world and leading indicators that confirm more to come
• Global monetary policy remains accommodative, though less so than in recent years with Federal Reserve tightening
• Robust global earnings growth expected for 2018 – double digit in the case of the U.S. (aided by tax reform) and Emerging Markets, and nearly 10% in Canada and Europe
• Inflation that remains contained for now
• Minimal near-term risk of U.S. recession based on variety of indicators

On the issue of trade, it is a situation we continue to watch closely for any signs of it turning into a bigger issue, thereby impacting the growth and earnings trajectory we mention above. We believe the market may be extrapolating a higher probability of a full-out trade war than we believe is warranted. It is worth noting that the tariffs announced yesterday by the U.S. and the retaliatory tariffs unveiled by China on Wednesday will not be implemented immediately. The U.S. tariffs are subject to a comment period lasting through the better part of May after which the administration has a minimum 180-day window to decide whether to actually proceed with implementation. For China’s part, they seem to be taking their queue on timing from the U.S. Lastly, Tom Porcelli at RBC CM Economics has reminded us a few times of late that it seems unlikely the U.S. administration would seriously push an agenda that would materially impact U.S. growth (and run the risk of completely offsetting all the work they accomplished on taxes).