So far, 2019 stock and bond returns are strong, but can it continue?


  • Big market swings netted out to modest quarterly returns for both North American stock and bond markets.

  • U.S. Federal Reserve cut interest rates for the first time since 2008.

  • Global growth, trade negotiations and geopolitical uncertainty (e.g. Brexit, Hong Kong protests) remain at the center of shifting investor sentiment.

Talk about a see-saw ride: Stocks were up and bonds were down in July. Then, stocks were down and bonds were up in August, followed by  yet another reversal with stocks going up and bonds going down in September. 

With each pendulum swing similar themes set the backdrop: the U.S.-China trade dispute cooled, heated up, then seemed to cool again – adding to uncertainty around global economic growth and shifting investor sentiment. Expectations around easing monetary policy wavered too, but ultimately the U.S. Federal Reserve (Fed) cut interest rates in July and September (the first rate cuts since 2008), while the Bank of Canada (BoC) left monetary policy unchanged. The European Central Bank (ECB) cut rates further into negative territory and announced the return of quantitative easing. 

Year-to-date returns at the end of September 2019 for North American stock and bond markets remain very strong, muting expectations that markets may find fundamental reasons to continue their pace of gains into year-end. This all begs the question, what should you do about it? The short answer: If your investment time horizon is less than ten years, you might want to consider de-risking your investment portfolio.

GLC portfolio managers weigh in with their current market investment strategies

“Now is not the time to bet big on equities.” That’s a key message from GLC’s Chief Investment Strategist, Brent Joyce. As part of GLC’s Asset Mix Committee, Brent highlights that balanced portfolios managed by GLC have already shifted modestly to a more defensive asset mix, while taking comfort in knowing that GLC’s investment mandates remain true to their style and investment objectives. Within specific portfolios, GLC’s portfolio managers have been tactically seeking out holdings that play to more defensive positions and/or holdings they see as being able to hold up better than their peers in the current environment. 

We asked some of GLC’s senior portfolio managers to expand on how they’re addressing the risks and opportunities of today’s market conditions. In doing so, we learn more about the value of disciplined investment processes and active portfolio management in managing market volatility while still focussing on strong, long-term returns.

Ben Fawcett, Vice-President, Equities and lead portfolio manager for Laketon’s equity growth portfolios: “Over the past year (and again in September) we have been diligently reviewing the portfolio to ensure that we invest in the type of high quality businesses that will continue to perform in up as well as down cycles. Companies with strong business models, balance sheets, and secular tailwinds not only excel in strong markets, but can take advantage in weak environments by stealing market share or acquiring weaker competitors. Ultimately our goal is to hold a diverse group of high quality, cash flow compounding stocks that possess below average cyclical exposure.” 

Clayton Bittner, Vice-President, Equities and lead portfolio manager for GWLIM’s Canadian and US dividend mandates: “We’ve preferred fewer cyclical investments for quite some time due to our concerns about cycle maturity and risk/reward in many areas of the market. The premiums being paid for supposed certainty are at, or approaching all-time highs, so we’re more defensively positioned now, owning more Utilities, REITs and cash – cash that’s ready to deploy when expected market volatility and fast sector rotations reveal opportunities to add to great companies at cheap prices.

Mark Hamlin, Vice-President, Fixed Income and lead portfolio manager of GLC’s Portico investment division: “During times like this, we prefer higher credit quality. Valuations are high across asset classes, but the most mis-priced seem to be equities and credit product, so we are somewhat defensive on credit. Regarding duration, we see more opportunities based on volatility than any outright duration call. In other words, we are trading tactically for investors, with the payoffs coming from taking advantage of asymmetric risks (and thus opportunities). Regarding sectors, low rates and inverted yield curves make it very difficult for banks to earn money, so we are negative on financials. Conversely, this environment is positive for REITs and the mortgage space in general. We are watching to see if falling profit margins start to impact employment. If it does (no sign yet) that could quickly impact consumer spending, and we would get cautious on consumer staples.”

Patricia Nesbitt, Senior Vice-President, Equities and lead portfolio manager for GWLIM’s Canadian Growth equity mandate: “Earlier in the year, we moved to de-risk the portfolio as we grew concerned that trade disputes would begin to meaningfully impact global growth; corporate earnings would suffer and valuations were stretched in many parts of the market. The portfolio is focused on owning high-quality companies offering superior and resilient earnings growth – with valuations that make sense. Our disciplined process will serve us well in these volatile markets, giving us an opportunity to add to our favored growth companies at more reasonable prices.  We have the experience that is necessary to manage portfolios through up and down cycles and the analytical talent and constant focus that allows us to take advantage of this volatility.”

Robert Lee, Vice-President, Equities and lead portfolio manager of GLC’s London Capital investment management division“Times of increased volatility is when our process and focus on risk management is an advantage because our disciplined, quant-based process is designed not to be subjective or swayed by emotion and bias. Our process and adherence to risk management is rules-based. Rather than spend our time guessing things like what the Fed (U.S. Federal Reserve) is going to say, our confidence comes from robust analysis of the current market against research and back-testing over multiple decades and market cycles. People often look for managers who will pick tomorrows winners, but history tells us that it’s the active portfolio managers who manage the risks while seeking quality companies that serve investors best in the long run.”


Falling bond yields in August make history and weigh down equity returns


  • Bond yields continued to collapse amid trade talk instability

  • U.S. yield curve inverts for the first time since 2007

  • Canadian equity returns were flat, while U.S., global and emerging markets declined

  • Canadian equity gains in Materials sector assisted by increasing gold prices

The big story for capital markets was the continuing collapse of bond yields amid ongoing trade threats and attention-seeking tweets from the U.S. President. The 30-year U.S. Treasury Bond yield fell below 2% for the first time in history – a headline that raised concern about economic recession on the horizon. Volatility rose and a risk-off sentiment took hold – driving fixed income returns up and weakening equity markets.

Fixed-income returns out of line with traditional views

On August 21, the 10s/2s yield curve inverted (meaning the 10-year U.S. Treasury bond traded at a lower yield than did its two-year counterpart) for the first time since 2007. Economics traditionally suggest that an inverted yield curve can be a harbinger of recession and of course, such was the case in 2008/2009. Increased media attention on this capital market event only added to the risk-off sentiment that already permeated markets as trade disputes and global growth concerns grew throughout the month. Investors flocked to bonds with thoughts of capital preservation over income opportunity. The result was that Canadian fixed-income investors gained almost a 2% return for the month, while equity investors realized flat returns in Canada, and negative returns pretty much everywhere else for global equity markets.

What’s most puzzling is how August’s decline in bond yields are at odds with overall economic conditions. On a Canadian macroeconomic level, firm inflation, solid retail sales on the back of the highest wage growth in over a decade (4.5% y/y), and better-than-expected GDP growth would typically lead to rising yields. As a result, we currently see the forward-looking risk and return tradeoff offered by the bond market, particularly from a capital gains perspective, to be out of line with many traditional views of fixed-income returns. Sizable monthly and year-to-date gains of 8.7% (at the end of August) are not the norms, and some giveback should be expected in the coming months.

Canadian stock market leads in August, propped up by gold

The Canadian equity market outperformed its U.S. (S&P 500), global developed (MSCI World Index) and emerging market (MSCI Emerging Index) counterparts – with the only bragging point being that the Canadian market remained in positive return territory for the month (up by a mere 0.2%), while the others suffered more meaningful losses of  2.0%, 2.7% and  2.7% respectively (local currency). Seven out of 11 Canadian sectors posted positive returns. The Materials sector (consisting of almost 12% of the S&P/TSX market weight) was a bright spot for Canadian investors, a result of increasing gold prices (up 7.1% on the month to $1,529.31) as investors sought out safe-haven assets. Smaller sectors like Consumer Staples (i.e., food retail), Information Technology (Shopify was up over 20%) and the yield-oriented Utilities sector posted solid single-digit positive returns on the month to contribute to S&P/TSX performance. The declines that weighed on the Canadian market for the period came from the three heavyweight sectors. The Energy and Industrials sectors were down mostly due to dropping oil prices, while transportation industries (specifically plane, train and automobile manufacturing) saw significant stock price declines. Financials were highlighted in the news cycle because of mixed reporting results and some missed earnings growth targets that led to a -2.7% net change. In looking at the big banks specifically, National Bank and Bank of Nova Scotia beat earnings estimates, BMO missed theirs and TD reported in-line results. Bank share prices reacted accordingly at the news, with strong gains of 4.6% and 3.5% by Scotia and National respectively, and a sizable drop for BMO shares to bring down the average. The good news for investors was that RBC, Scotiabank and CIBC chose to increase dividends. Cannabis stocks within the Health Care sector continued their roller-coaster ride, giving back returns from earlier in the year just as quickly as they were gained, and causing the sector to be the laggard, with a -13.0% return on the month.

The U.S. equity market gave back much of the gains that came earlier in the summer. Three influential voices gave equity markets ample reason to swoon: U.S. Federal Reserve Chair Powell’s comments fell short of market expectations for more rate cuts and Presidents Trump and Xi engaged in tit-for-tat protectionist trade responses. Never wishing to be left out, Europe’s own political tensions continued to impact markets. European equities struggled to put in strong weekly showings throughout a month where Brexit developments put an unwelcome twist on G7 meetings and U.K. equities.

A desired return to normalcy

The end of summer means a return to routine – the children go back to school and parents go back to work. It’s comforting to get back to a familiar situation. While markets may swoon amid political policies debated via twitter (or the tendency for media to focus on sensational doom and gloom market scenarios), investor confidence can continue to grow. By knowing their professionally managed investment plans are positioned to withstand market fluctuations, investors can reap the long-term benefits of being well-diversified and aligned with personal risk and time horizons.


Warm weather, barbeques and easy money - what's not to like?


  • Consumer-facing sectors were July’s bright spots on news of interest rate drop.

  • U.S. large-cap indices (S&P 500, Dow Jones Industrials and NASDAQ) set new all-time highs.

  • Mild volatility appeared mid-month, especially in Canada’s Energy and Health Care sectors.

  • Fixed-income markets heated up after what started as a cool month.

Trade tensions took a breather for most of the month, allowing interest-rate decreases to grab headlines. U.S. equity markets reached all-time highs on the back of consumer spending, rising performance for gold-related industries and increased oil prices. Canadian Energy and Health Care sectors suffered company-specific setbacks and fixed-income markets heated up after a cool start.

To view the full report with all accompanying sections, tables and charts, please see the attached PDF report at the bottom of this article.

July’s stock markets bring summertime highs before cooling off into August

Warm weather, backyard barbeques and new market highs – July brought no shortage of reasons to kick back and enjoy a cool beverage. Consumer confidence followed suit with sunny ways. Sentiment brightened as trade tensions took a breather for most of the month and expectations for a U.S. Federal Reserve (Fed) interest rate cut grew. Consensus estimates for corporate earnings were lowered coming into quarter end, which helped most companies deliver blue-sky results by beating quarterly earnings expectations.

In the very last week of July, investors spotted storm clouds on the horizon when the Fed dampened expectations of more rate cuts ahead. Flight-to-safety trades ensued leading stock markets to retreat from their mid-month highs, while bond investors recovered. Point to point, July’s capital market returns were flat or muted.

Fed expectations fuel market enthusiasm

All three U.S. large-cap indices (S&P 500, Dow Jones Industrials and NASDAQ) set new all-time highs in July, with the Dow Jones Industrials and S&P 500 crossing round-number milestones of 27,000 and 3,000 respectively. The S&P 500 rode a wave of optimism for most of the month thanks to expectations of a U.S. interest rate cut (that were priced in early, eventually to be fulfilled on the last day of the month). While the Bank of Canada was not expected to follow suit with a similar rate cut, the S&P/TSX Composite Index also reached a new high before settling back to its beginning-of-the-month level (but still over 14% on a year-to-date basis).

Fixed-income markets heated up after what started as a cool July. What was good for stock prices weighed on bond values. For much of the month, fixed-income yields rose, eating away at bond investors’ returns. The less-than-encouraging statements from Fed Chairman Powell on July 31 reset the mood by reversing stock market gains and re-cooping bond market losses. The FTSE Canada Universe Bond Index needed a last-day rally to avoid a loss for the month, ending up with a gain just a fraction above zero.

Canada’s consumer-facing sectors, were July’s bright spots

Canadian consumer confidence in July rose to its highest level of 2019 (thanks to low interest rates and low unemployment factors). The S&P/TSX Composite Index reflected that when Canadians are happy, they like to eat and shop: Consumer Discretionary and Information Technology (IT) led all sectors. In particular, quick-serve restaurants and retailers did well, while Shopify in the IT sector continued to grow at a tremendous rate with a near 7% monthly gain. The S&P/TSX gold sub-sector rose over 5% as investors looked to play defense following the news of the Fed downplaying expectations for additional rate cuts in 2019 and curtailing investors’ hope for more easy-money policies. A desire for security and a defensive focus have also helped gold prices rise more than 11% thus far in 2019. Ongoing cautionary sentiment about trade (with uncertainty once again fueled by President Trump’s tweets) has boosted the price of gold significantly this year, contributing to the strong returns from Canada’s Materials sector.

Mild volatility appeared during the middle of the month, especially in the Energy and Health Care sectors. Canadian energy-related stock performance continued to be weak despite oil price strength. In July, Canadian energy companies were once again weighed down by negative headlines concerning the construction of pipelines – this time from Enbridge’s Line 5 pipeline and a potential legal challenge in Michigan. Canada’s cannabis high wore off, bringing the Health Care sector down with it. The large selloff within the sector was triggered by a licensing scandal at CannTrust Holdings Inc. as senior executives appeared aware of the growth of cannabis plants within unlicensed rooms of their facilities.

Europe’s political and economic uncertainty continues

International and emerging markets started high and then dropped throughout the rest of the period to settle at month-end lows. On the positive side, European companies saw better than expected earnings results; however, the economic outlook remains less rosy. The International Monetary Fund reduced its global growth forecast and the European Central Bank hinted at the possible need for future economic stimulus action. Boris Johnson began his term as U.K. Prime Minister with demands for a renegotiation of the E.U. withdrawal agreement, issuing a threat to leave without one. It’s difficult to know if investors will see the changing of the guard (from Teresa May to Boris Johnson) as relieving or exacerbating Britain’s political and economic conditions. So far, it looks like the later. The British pound swooned in July, pushing down near its lowest in two years. Likewise, sovereign yields declined in Europe, with German sovereign bond yields dropping into record-breaking negative territory. Meanwhile, Asian markets were mixed in July as both regional and global trade concerns continue to be a dominate focus.

Diversification can be an investor’s best friend

Early signs for August’s capital markets indicate that rising trade tensions and economic uncertainty will bring about an increased return of volatility – a time when diversification can be an investor’s best friend.

2019 Mid-Year Market Review: The bull market in everything

The first half of 2019 saw equity markets around the world bounce back following a challenging final quarter of 2018. Double-digit gains allowed North American equity markets to regain new highs. Bond yields plummeted, resulting in very healthy returns for fixed-income investors.

Trade tensions dominated the year’s first-half narrative, but a dovish policy shift from various central banks, most notably the U.S. Federal Reserve, provided welcome support for equity markets. With inflation remaining contained, the Fed pivoted toward a rate-cutting bias in an effort to prolong the current economic expansion.

Global growth showed signs of deceleration in the first half of the year, particularly in forward-looking survey data, such as Purchasing Manager Indices. Along with softer economic data, a rapid decline in bond yields flashed a warning to economic momentum. Canadian and U.S. 10-year bond yields fell below 3-month yields resulting in a portion of the yield curve becoming inverted. North American bond yields continue to be weighed down by negative interest rate policies on the part of central banks in Europe and Japan. German 10-year government bond yields fell as low as -0.33% in June and bear a lower negative yield than their Japanese counterparts. The pile of negative-yielding global bonds now stands at a massive US$12.92 trillion.

Trade uncertainty resulted in increased equity market volatility. The trade battle between the U.S. and China ebbed and flowed. Early year optimism over a potential deal initially supported equity market growth. Then tensions ratcheted up after talks broke down in early May, resulting in increased U.S. tariffs on Chinese imports and imposed sanctions against Chinese tech giant, Huawei. The trade battle is being waged on two fronts: trade in goods, excluding technology; and, a separate battle for technology with its attendant national security concerns. Investors weighed the probability of an escalating trade war – and the resulting hit to corporate earnings – versus the possibility that some sort of deal could be struck at any point. Trade developments remain hard to predict; particularly so in an era where a ‘tweet’ can instantly change the narrative.

Oil prices bounced back as U.S. WTI crude prices rallied over 50% from their late-2018 lows,peaking in April at US$66/bbl, then sinking back to the low $50s on fears of slowing demand growth and high inventory levels, before finishing June with another run at $US60/bbl. Gold prices rallied above $1,400 on a more dovish Fed, falling bond yields, and a weaker U.S. dollar.

Canadian Equities

Canadian equities enjoyed a robust first half of 2019. The S&P/TSX Composite was up double digits, as all eleven GICs sectors finished in the green. Information Technology led gains, helped by spectacular returns from high flying e-commerce firm Shopify (up 108%). The small but growing Health Care sector also saw big price gains, pushed higher by continued flows into cannabis stocks. The heavyweight Financials and Energy sectors were big contributors, benefitting from an improved macro backdrop relative to late 2018. The large Canadian banks reported mixed financial results, but are generally continuing to benefit from a robust Canadian economy and limited signs of credit stress. The Energy sector benefitted from higher oil prices, while falling interest rates also provided a tailwind for the higher-yielding pipeline stocks. Canadian heavy oil differentials narrowed sharply on the back of government mandated production cuts. Other interest-rate sensitive sectors such as Utilities and Real Estate were boosted by the sharp drop in bond yields. The Materials sector lagged for much of the period before a sharp June rally in gold prices brought on strong performance. Base metal prices saw more muted gains due to the trade concerns that weighed on the outlook for global growth and the demand picture from emerging market economies. On a style basis, growth equities outperformed, while Canadian small caps significantly underperformed largely due to weaker energy sector returns – cautious energy investors have gravitated to more defensive, larger market cap energy names.

U.S. Equities

The S&P 500 rebounded strongly following sharp losses in Q4 2018, hitting a new record high in April and again in June to extend the current record long bull market run. Now into its eleventh year, the S&P 500 is up a cumulative 334.8% or 15.4% CAGR from the March 9, 2009 low of 676(see GLC Insights – Riding the backside of the U.S. bull market). The policy pivot from the Fed was a key factor in flipping investor sentiment. Investors appeared to largely look through the trade-related noise, hoping and expecting a truce in the trade war. A stellar 13.6% price-only return in Q1 (U.S. dollar terms) marked the best quarterly return for the S&P 500 Index since Q3 2009, while a June rally allowed Q2 to finish in positive territory.

All eleven sectors finished up on a YTD basis, with only Health Care failing to reach double-digit returns. Information technology led gains, helped by strong returns from mega-cap names such as Microsoft, Apple, Mastercard and Visa. Continued strong gains from e-commerce giant Amazon lifted the Consumer Discretionary sector. The stabilized macro environment contributed to robust gains for the U.S. banks within the Financials sector. The Communication Services sector lagged the broader market as headline noise regarding increased regulatory headwinds weighed on select names such as Alphabet. Falling interest rates provided support for interest-rate sensitive sectors, such as Real Estate and Utilities.

Surge in IPOs

IPO activity surged in the U.S. during the first six months of the year, with the market rally providing founders and owners of private companies a window of opportunity to go public. Notable IPOs included ride-sharing giants Uber and Lyft, as well as the popular workplace communications company, Slack. These companies saw share price weakness following their public listings, but one big IPO winner was Beyond Meat, who saw its share price gain over 6x on huge hype around its plant-based protein alternatives.

International Equities

International equities produced positive gains but trailed their North American peers. European equities moved in tandem with their global peers despite continued political uncertainties. Brexit deadlines were pushed out to the fall as both sides were unable to come to a deal, prompting U.K. Prime Minister Theresa May to resign. Populist pressures remained front and centre in Europe: Italy and the E.U. battled over fiscal targets and street protests continued in France. Japanese and emerging market equities both underperformed, largely due to trade and Chinese growth concerns. Europe and Asia are both severely impacted by whatever moves China makes. The uncertain trade outlook was somewhat offset by Chinese policymakers embarking on a substantial set of economic stimulus policies, spurred on by trade and growth concerns.

Fixed Income

The FTSE Canada Universe Bond Index produced strong returns in the first half of 2019, with the 6.5% total return exceeding the full calendar year return in each of the previous four years. North American bond yields fell sharply during the period, continuing a trend that began early in the fourth quarter of 2018. Canadian 10-year bond yields are now more than a full percentage point below their early October 2018 levels (which had marked a four-year high). Long-term bonds outperformed relative to their shorter maturity counterparts. On a sector basis, provincial bonds were the clear winners while high-yield bonds lagged.

The fall in bond yields coincided with a policy shift from various central banks, most notably the U.S. Federal Reserve, which abruptly shifted to a rate-cutting bias after most recently hiking rates a quarter point last December. The Bank of Canada (BoC) left rates unchanged during the period as our bank rate sits 0.75% below that of the U.S. The BoC continues to monitor developments, both domestically and abroad – most notably an unratified USMCA and a reticence to encourage further borrowing amongst already indebted Canadian businesses and households.

GLC’s 2019 Mid-Year Capital Market Outlook

The Bull Market in Everything: Investment positioning for times that can’t last forever.

We believe the global economy has enough positive momentum to exit the current global slowdown within the next two to four quarters. However, at this juncture, equities are pricing in some of the more positive outcomes, despite great uncertainty remaining with the outcome of the U.S. trade agenda and the magnitude and timing of central bank easing interventions. What’s causing us concern are the sharp advances in equities, commodities and bonds. The ‘bull market in everything’ scenario is not one that can last forever.

Our 2019 Mid-Year Capital Market Outlook calls for single-digit equity price gains between now and the end of the year. Bouts of trade-, political- and geopolitical-related volatility may be severe enough to present buying opportunities for those comfortable with a pro-risk stance. This expected environment lends itself to active portfolio management with its tactical slants and individual security selections that seek out superior growth, quality and/or yield opportunities within markets. We are maintaining our asset allocation at neutral, aligned with one’s own risk tolerance – a balance between exposure to participate in equity market growth without over-reaching for risk.