The dog days of summer were in full force in August as many traders took some down time. Market volumes and new issue activity were down, resulting in a mixed month on the markets. Canadian bond markets were mostly higher as yields eased. The FTSE/TMX Canada Universe Bond Index ended up 0.75%, with corporates outpacing governments on a slow new issue calendar and tight dealer inventories.
Equity markets were mixed, with U.S. equities leading the way higher on another strong showing from the big cap tech names. The S&P 500 gained 3.6%, while the Russell 2000 rose by more than 4.6% in Canadian dollar terms. Closer to home, the S&P/TSX Composite was lower by 0.8% on weakness in the energy and materials sectors and continued worries over trade talks with the U.S. European markets were also down falling 2.6%, while Asia lost more than 1%. Emerging markets struggled on fears that recent troubles in Turkey, Argentina, and Venezuela could spill over into the more developed markets.
In this environment, the portfolios were all positive, with our Moderate Balanced Portfolio gaining 0.19%, while our most aggressive Growth Portfolio rose by 1.14%. Our Balanced Portfolio gained 0.53%.
For a more thorough review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. Additional detail can be found in these reports generated by Morningstar. A summary report can be downloaded here, while the more detailed report can be downloaded here.
Our more defensive offerings, the Conservative and Moderate Balanced Portfolios trailed their benchmarks, with most of the underperformance being attributed by their exposure to the Mackenzie Ivy Foreign Equity Fund. Despite a 0.5% gain in the month, it trailed the index and weighed on the portfolios’ relative performance. Our other portfolios, Balanced, Balanced Growth, and Growth all outperformed their benchmarks, thanks to strong performance from our Canadian and U.S. equity funds.
Despite a rather subdued month, the markets reached a notable milestone, as the current bull market became the longest bull market in history. While some may dispute this claim, the truth is that it doesn’t matter whether it’s the longest, second longest or whatever. The age of a bull market is largely irrelevant. There is a saying that’s been floating around a lot lately that says bull markets don’t die of old age. As cliched as it sounds, that’s very true. When markets turn, it won’t be because it hit some predetermined time limit. It will be because there is an erosion in the fundamentals that cause investors to pull their money from equities.
And make no mistake about it, this bull run will eventually end. We don’t know in advance what the trigger will be that makes investors realize that markets need to correct, and often times, even with the benefit of hindsight, it is extremely difficult to pinpoint the exact cause. And more often than not, the cause is something that very few people could identify in advance.
Markets have rebounded strongly from their March 2009 bottoms, particularly in the U.S., but market returns haven’t been unreasonable. In a piece published by Outcome Wealth Management, they note that outside of the U.S. equity markets, returns have generally been very modest. The S&P 500 has gained an annualized 15.1% since the bull market stared, however Canada has gained an annualized 4.9%, Europe has annualized just shy of 7%, and Japan is up 5.7%.
Valuations are high, particularly in the U.S. but earnings growth, job creation, and GDP growth all remain positive. Credit markets, which are often a strong predictor of equity markets, remain solid, except for some pockets in Europe and the emerging markets. Obviously, we’ll want to stay on top of these for any further erosion, but at this point, there are no alarm bells ringing loudly.
Yes, there are reasons to be concerned. Trade wars, slowing earnings growth, worries over the yield curve, the potential for rising inflation, tighter monetary conditions, and external geopolitical events are all likely to weigh on investor sentiment. However, these are all reasonably well contained at the moment, and while they need to be on our radar, they are not immediate concerns. As I was saying to a portfolio manager last week, things are fine – not great, not bad, but fine.
This is not the environment to be making big bets. Instead, it is an environment to remain cautious and modestly defensive. There is still room for the markets to move higher, but there are real and meaningful risks for a serious market drawdown. I continue to believe our portfolios are well positioned for this type of environment. While we run a very high probability of trailing the benchmarks in a sharply rising market, we are also very well positioned for a sharp market selloff, with our conservative positioning that emphasizes valuation and quality over growth and high beta.