By Scotia Wealth Management - The Zukiwsky Group (Sponsored)

Market Watch – January 4, 2019

Jan 4, 2019 | 9:46 AM

Investors Bracing for More Volatility as Chinese Economy Slows

Investors were understandably eager this week to bid farewell to 2018. In Canada, the TSX was down nearly 12% for the year, while the loonie declined almost 8%, its worst performance in three years, as oil prices plummeted and expectations faded for more rate hikes in 2019 from the Bank of Canada. The year’s numbers in the U.S. were also disappointing: The Dow fell 5.6%; the S&P 500 was down 6.2%; and the Nasdaq was off 4%. It was the worst year for stocks since 2008.

December was especially brutal: The S&P 500 was down 9%, and the Dow shed 8.7% — the worst December since 1931. In one seven-day stretch, the Dow fell by 350 points or more six times. For the S&P, the only sectors to finish higher for the year were healthcare and utilities. Energy, materials, communication services, industrials and financials were the biggest percentage losers of 2018, down between 14.7% and 20.5% from the year’s start. While markets registered slight gains Wednesday over hopes of a trade truce between the U.S. and China, volatility reared its ugly head again on Thursday as the Chinese economy exhibited clear signs of weakness. China’s official purchasing manager’s index fell in December to a two-year low. Just as troubling was news Thursday that Apple had slashed its quarterly revenue forecast for the first time in more than 15 years, citing a sales downturn of iPhones in China. The news from Europe wasn’t much better as eurozone manufacturing activity dropped for the fifth month – barely avoiding contraction – while U.S. factory activity also slowed in December, in light of waning demand. By day’s end, it was another day of red numbers, as the Dow plummeted 660 points, the TSX shed 81, while the S&P and Nasdaq tumbled 2.5% and 3%, respectively.

Fears of Global Slowdown Weigh on Markets

For the three trading days covered in this report, the Dow dropped 376 points to close at 22,686, the S&P 500 declined 38 points to settle at 2,448, while the tech-heavy Nasdaq shed 391 points to close at 6,464. In Canada, the TSX was down 9 points to end at 14,213.

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Equities

We continue to recommend modest overweight exposure to equities relative to our long-term, strategic asset allocation model. We recognize the maturity of the business cycle and the potential for more policy interest rate hikes in 2019 by major central banks. We also remain mindful of other risks, including U.S.-China trade tensions, rising input costs, and U.S. dollar strength. That said, we expect U.S. corporate earnings to continue growing next year, potentially in the upper-single digit percentage range should consensus forecasts pan out. Given the maturity of the current business cycle, we have tactically reduced the economic sensitivity of our equity guided portfolios by trimming exposure to the semiconductor and automotive industries. We maintain our belief that the best way to invest in emerging markets is through well-capitalized multinationals domiciled in advanced economies.

(Bill Curry)

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI.