Fears of a retest of the December lows have seemingly been pushed aside for now, as global trade tensions have abated and interest rate hikes appear to be off the table for the year. Global equity markets continued to advance in February, lifting the year-to-date performance for most markets above 10%.
The shock of the sell-off that ended last year left many investors defensively positioned and holding more cash than normal. When cash levels are high and everyone’s waiting for an opportunity to get back into their favourite names, it’s often a setup for the opposite to happen; the market has a tendency to do what makes the most people wrong.
Corporate earnings came in as expected, but uniformly have been met with buying as investors cheered numbers that proved to be better-than-feared. Information technology has once again led the market higher with many software stocks up over 20% on the year. This market isn’t as narrow as previous markets, but those who called the end of the FANNG trade may have been premature. Defensive sectors are lagging and the long-suffering energy stocks are quietly up 15% on the year.
Geo-political risk remains elevated yet largely ignored. What will change that remains unknown as markets appear numb to crazy Trump headlines and events such as Brexit. With the Federal Reserve on the sidelines, largely attributed to slower global growth, it’s almost a case of bad global news is good for risk assets as it further extends the pause in rate hikes.
A skeptic would point to the fact these global fears were present all of last year but central banks remained hawkish until a dramatic selloff in equities forced Fed Chair Jerome Powell to change camps and back down. The S&P 500 was around 2,900 before the sell-off that took it down to 2,350. With the rebound back above 2,800, you could be forgiven for wondering, ‘if the market returns to 2,900, do rate hikes come back to the table?’
If it all comes back to global growth fears, it’s always important to watch the metals. Copper is approaching $3/lb. and is above the 200-day moving average for the first time since last summer. There is a chance copper is saying these growth fears have passed and emerging markets may be starting to recover. It’s also important to note that the US 10-year Treasury yield, which started the year around 2.5%, is now over 2.75% and heading higher.
Higher bond yields, higher copper prices and higher equity markets may cause the market to question if central bankers really are on the sidelines for the entire year. Will markets handle a more hawkish Fed better this time around? It’s too soon to tell, but this is required watching.
Markets are off to their best start to the year since early the early 1990’s. It’s hard to imagine it will be a straight line higher, but absent a major shock, we don’t expect a dramatic sell-off either. It’s prudent to take some risk off the table, but also important to keep invested.
Ideas with Purpose
Purpose Global Bond Fund (BND): While we think it’s advisable to take some risk out of portfolios, we also believe it’s wise to maximize returns as well. BND provides a higher yield than Canadian and US 10-year government bonds. It also yields higher than the US investment-grade corporate bond index with a lower duration. Diversification across a variety of regions provides further protection.
Purpose Multi-Strategy Market Neutral Fund (PMM): The investing environment is relatively uncertain right now, but we believe it is important to remain invested and diversify into alternative investments. PMM has the ability to source returns from multiple markets with low correlation to one another. The Fund has been firing on all cylinders so far this year, capturing a portion of the equity market rally while also generating meaningful returns from long and short exposures to commodities and currencies.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments.
All data sourced from Bloomberg.
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