May Market Review
May was a negative month across board with trade tensions putting pressure on world financial markets and turning sentiments negative. S&P500 was down 6.6% and S&P/TSX down 2.8% respectively. Chinese Shanghai Composite was down 5.9% and Europe measured by Euro Stoxx 50 was down -1.49%.
A terrible Q4 2018 was followed up by a fantastic Q1 2019 with recovery back to previous summer highs. In May, financial market sentiments have shifted downward significantly. While volatility in the markets and a pullback from a recent 20% rally is to be expected, more downward pressure are likely given the trade tensions between US and China as well as Mexico to continue.
Getting back to the basics…
Canadian Q1 GDP increased 0.4%, essentially matching a 0.3% increase in Q4 2018. A strong Q1 GDP number could result in stronger than forecasted 2.2% annual growth by RBC Economics. The main growth driver of the Canadian economy is still the Canadian consumer. Spending rose in 8 out of 9 subcategories of equipment investment and net trade was a drag on the economy as a result of lower oil production.
Broadly speaking the international communities are still cautious in investing in Canada given the imbalance in the contributions to GDP. Over the past 5 years, Canadian consumers have supported the growth of the domestic economy, however other GDP contributors such as business investments and net exports have stalled. Such economic fundamentals are also reflected in the laggard return of the Canadian financial market in recent years.
Canadian contributors to GDP
Sources: Statistics Canada, Haver Analytics and FMR Co.
Taking stock of the US vs. China trade war
US has raised tariffs to 25% on $200 billion of annual Chinese imports on May 10, 2019. As a result, US imports from China have declined quite sharply on goods on which tariffs were imposed. China has retaliated with its own tariffs on $110 billion of US imported goods.
Large drop: % change in import since announcement of tariffs
US import from China after tariffs Chinese import from US after tariffs
Source: IMF, US Department of Commerce Source: IMF, US Department of Commerce
So far the majority of the impact from imposed tariffs have been born by both US and Chinese consumers and what is not passed on is absorbed in the form of reduced profit margins by producers. There are winners and losers from the recent trade dispute. For example, a sharp decline of nearly $850 million in imports from China by US was almost offset entirely by increase from Mexico.
The trade story is certainly an evolving story that will change the current economic paradigms that market participants have acquainted themselves with. As from my conversation with clients on the recent trade issue, it is a longer term story which is driven by the rise of the Chinese economy. Investors may be disappointed if they anticipate a solution or reconciliation in the short term. However, the markets have certainly experienced and overcame larger and more severe economic events while still innovating forward. By sticking to the long term investment strategy, we can navigate through the current market turbulence.
Rita Li works with high net worth individuals and families to provide a high touch service in holistic wealth management planning. Her team encompasses professionals with in-depth taxation and legal backgrounds, together, they strive to deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with expertise in asset management. Rita obtained her MBA from Richard Ivey School of Business.
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