Global equity markets rebounded in June, putting an exclamation point on one of the strongest starts to a year ever. With the bounce, most markets have reached levels near their all-time highs. The questions now are, “does this optimism match reality and can markets keep climbing the wall of worry?”
The percentage change in markets is partly a function of a rebound from an awful end to 2018, but most of the credit is due to the abrupt reversal of the Federal Reserve. Many observers, including US President Donald Trump, now claim the Fed made a mistake last year by hiking rates. Fear of the supposed mistake was partly to blame for the sell-off in Q4 last year and the Fed’s reversal to a dovish stance in January is mainly responsible for the rebound. Markets went from expecting rate increases to now expecting three rates cuts by year’s end. The volatility resulting in this change has, of course, affected bonds, stocks and currencies.
Trade is another risk that markets have had to work through this year. Corporations have been cautious in giving guidance as uncertainty around trade persists. Analysts continue to expect a strong recovery in the second half of the year to offset the slow start to earnings. Second quarter earnings reports will be interesting if executives have any further clarity on their operations or if they’ve seen an increase in sentiment.
While the June bounce back in equities was impressive, some of the more notable moves came from gold and Bitcoin. The US dollar has been choppy most of the year, but it dropped last month on the dovish Fed comments. With the greenback falling, gold is surging, finally breaking through the $1350/oz level, which has been the ceiling for the past five years, and ending the month over $1400/oz. What may be related is the move in Bitcoin and the other cryptocurrencies. Bitcoin, which many had written off, is now up over 200% on the year and taking aim at previous highs. Both gold and bitcoin moving higher could signal fear is creeping back into the market.
Energy was able to continue its move higher, recovering most of the losses from May. Iran-US tensions helped, but inventory data also continues to improve. Oil is now up 25% on the year, while energy stocks continue to languish. The Canadian government announced they will ‘green light’ the long-needed Trans Mountain Pipeline project. However, the suffering Canadian energy sector continued to trade lower, potentially setting up one of the better contrarian investment opportunities in years.
Given the concerns around trade and politics, many may have expected markets to be lower on the year, yet they aren’t. With a record amount of global bonds now at a negative yield, and the US 10-year Treasury at 2%, this could simply be a return of the TINA (there is no alternative) market.
There is a simple rule to markets: you don’t fight the Fed. It’s been a pretty accurate indicator so far. Unless peace breaks out and all trade disputes disappear, it’s unlikely we will see a hawkish Fed anytime soon, which is supportive of risk assets.
The market should experience higher volatility for the balance of the year. The pressure will be intense on the Fed to cut rates. Corporate earnings will be analysed for any signs of weakness resulting from trade wars. But there is a fine balancing act underway.
If earnings and economic data start to improve, is there really a need for rate cuts? Any hint of hawkish comments could shake the markets. With equities at all-time highs, the risk/reward may not be an ideal setup to go ‘all-in’ on risk. Investors should stick with quality and pare back on some of the more hyped parts of the market.
The analogy could be made that anyone jumping into equities right now is similar to someone walking into a crowded bar before closing time. Do you really want to order a few shots (hot IPOs like Uber and Beyond Meat), or is it a better plan to grab a water and watch the action from a safe, more defensive distance?
Ideas with Purpose
Purpose Gold Bullion Fund (KILO) is a low-cost way to own physical gold, which is pushing into territory not seen by the precious metal in more than five years. While we won’t be making any calls as to where gold will go, we think it remains an effective risk-off asset that’s suitable for uncertain markets. With KILO, your physical gold is held on a fully segregated basis at the Royal Canadian Mint. Your gold can be redeemed and delivered to you upon request.
Purpose Tactical Asset Allocation Fund (RTA) is an agile, systematic fund, designed to respond to changing market conditions. The Fund holds primarily index-based ETFs and can quickly rotate between risk-on and risk-off positioning by adjusting its equity and fixed-income allocations. It can serve two purposes in a portfolio, either as a volatility-management strategy or as a conservative way to put cash on the sidelines to use.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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