Q1 Commentary 2018

We have read some great musings over the past couple of weeks as experts sound off on the next great bear market in bonds and what a trade war may mean for global economics. Some of the writings have even used baseball analogies and the prowess of Money Ball to justify their greatness. Most of the writings assert from one common theme - we know what is happening and what we do is good for all. The component that seems to be missing is the recognition that we are all human. As humans, we all make mistakes. This is a for sure and for certain statement that will stand the test of time. As parents, we have taught our kids well, but no child is perfect. My mom can attest to this… As I suspect other mothers can as well. Perhaps the challenge is in not making “really big” mistakes? Or perhaps a reduction in the frequency of mistakes – enter batting average here for the start of baseball season and to keep the analogy posture present and accounted for. Below, we will articulate the facts of the markets and what we are seeing at the ground level. We will underscore some of the highlights of the quarter and articulate the changes we are making to ensure prudence remains present in our thinking. We will round off with a brief outlook of the next few quarters and some of the aspects of the economic make up that may keep us somewhat cautious.  

Major Markets

Most major markets had a difficult ride through the first quarter. The chart below illustrates the DOW which often quoted was down about 3% in the first quarter.

Source: VIP Wealth Solutions and Bloomberg

Looking a little closer to home the story was perhaps a tad bit worse with the TSX down 5.27% in the first quarter (index price reflection only).

Source: VIP Wealth Solutions and Bloomberg

The one point of data that was perhaps most telling or even the most frictional for all market participants was volatility. This went from a very quiet point to a dramatic spike in early February and has stayed ever present as we're now in April. With Tweets, Missile Launch threats and the ongoing barbs around global trade we expect this escalated level of volatility to stay around for a bit.

Source: VIP Wealth Solutions and Bloomberg

Quarterly Highlights

The US and Emerging Markets continue to play out better than our at home market (The TSX). This has kept portfolios more buoyant than the TSX. In selected strategies, we have reduced risk and dialled down the exposure. In other models, we have stuck with our underpinned economic growth forecast for the time being and will adjust if fundamentals start to fail. Currently, as illustrated above, there is no trend in volatility – I guess that is why they call it volatility. The technology sector remains a focus across all mandates and continues to add support to overall performance. This comes at a price as we have seen in the privacy breaches of Facebook and privacy concerns from regulators. We have not overreacted to these news blurbs, but in some cases, we have improved the overall quality of our holdings and look to trim excesses.


Earlier this year (January 22), we posted a blog entitled Red Flags – Does anyone want to raise one? The piece was a bit of a deeper dive into some detailed analytics. One chart was the Global and US Economic Surprise Index. Our thinking at that time was that the index was almost at or near its all-time high and that it was impossible for it to likely maintain itself. At that time, the US index was at around 80, since that time it has fallen in the US to 28.3. This should not signal the end of the world, but perhaps just a little bit less to get excited about. The chart below shows both major economies and the US:

Source: VIP Wealth Solutions and Bloomberg

We highlighted the leading economic indicators and they have continued to go up? Yet, surprises are down?

Source: VIP Wealth Solutions and Bloomberg

Consumer Confidence has continued to tick higher:

Source: VIP Wealth Solutions and Bloomberg

The outlook remains okay for now. The markets are not feeling great with the overlay of volatility, but there is little in the way of an economic smoking gun at this point that we see. Some of the more recent chatter has been focused on raising consumer debt and defaults. There is more work to uncover every day and this is perhaps something we will blog about going forward.

Canada/US and Rates

This topic is dear to most that have a house and a mortgage attached. This macro thinking is difficult in the easiest of times, but important to be aware of as policy divergences escalate and economic forecasts change. Today, in Canada, economic growth is undershooting the bank of Canada's earlier projections. The most recent news out of the housing market is suggestive of lower volumes and lower realized prices. This faltering of economic growth may cause Canada to take a pause with regard to interest rate increases. The expectation is that the policy stays at 1.25% for some time. Some outside thinking suggests that if the economic construct weakens it may float back to 0.50% by the end of 2019.

The US, on the other hand, seems poised to continue to raise rates at least two more times this year. One would have to think this would provide support for the mighty greenback relative to the Loonie!?

Final Thought

The economy is trying to figure out its next move. Quantitative easing is fading into a distant memory and the world is trying to figure itself out under the strange leadership (enter Trump and bare-chested Putin here). We can only guess that there will be more twists and turns in the coming quarters. We have our eyes wide open, glued to the road and are looking to avoid any big mistakes yet not forget about opportunities.

Thank you for reading and enjoy the day.  



The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.