Markets came roaring back strong in January after what can charitably be best described as a horror show in December. The S&P/TSX Composite Index shot higher, gaining 8.74% with all sectors moving up with heavyweight financials and energy leading the way. The S&P 500 gained more than 8% in U.S. dollar terms, and the MSCI EAFE Index rose by 6.6%.
In January the portfolios all ended the month in positive territory, however trailed their respective benchmarks. The Conservative Portfolio gained 1.3%, while the benchmark rose by nearly 2.2%. The 60/40 Balanced Portfolio closed higher by 2.1%, trailing its benchmark which was up 3.6%. Our most aggressively positioned portfolio, the Growth Portfolio gained 3.4%, compared to a 5.3% surge in its benchmark.
For a more thorough review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. More 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.
As much as the rebound was impressive, most of it was the result of the rout in December which took markets well below fair value and into oversold territory. January was a correction of this, bringing markets to a more balanced position. For those who were both quick and courageous enough to step in and buy in late December and early January were rewarded with nice gains, as tremendous bargains were to be found across the investment markets.
Also helping to fuel the rally were comments from central bankers, namely U.S. Federal Reserve Chair Jerome Powell who stated that the next move in rates would be dependent on what the data was indicting, and not on some predetermined normalization path. This buoyed sentiment and led some to speculate the Fed would take a pause in 2019 and keep rates steady. Some have even started suggesting the next move from the Fed would be down. With the pace of rate hikes slowing, the U.S. dollar was weaker, falling from $1.3642 CAD to $1.3144 CAD in the month. Corporate earnings numbers were strong and when combined with hopes that a trade truce with China could be reached, investor enthusiasm pushed markets even higher.
Economic data released in the month showed the global economy feeling the effects of the trade war, with positive, but slowing numbers. However, some higher frequency data points, namely retail sales and industrial production rebounded, suggesting things are starting to stabilize.
Bond markets moved modestly higher as yields moved lower. Not surprisingly, longer dated issues outperformed shorter dated issues and corporate bonds outperformed governments. The corporate outperformance was driven by two factors, the higher yield helped boost returns in the falling rate environment, and like the rebound in equity markets was pushed higher thanks to recovery from oversold positions.
Digging deeper into the portfolios, all the underperformance was due to two very defensively positioned funds; the Fidelity Canadian Large Cap Fund, which gained 1.3% while the TSX roared higher by nearly 9%, and the Mackenzie Ivy Foreign Equity Fund, which was inexplicably down 0.6% in a month where the MSCI World Index rose by nearly 4%. (At the time of this writing, we are waiting on comments from Mackenzie to explain this performance.) These funds offer exceptional downside protection in volatile markets, which is why they are in the portfolios. That said, Ivy has moved to the top of my lists of Funds that are currently under review
While the overall tone has improved from December many risks remain including the ongoing trade war with China and the possibility of another U.S. government shutdown being the biggest threats. Because of these risks I expect volatility to remain high. As a result, I continue to emphasize quality both in fixed income and equities. I continue to favour equities over fixed income, although only slightly. For equities, I am favouring defensively positioned Funds that are expected to hold up well in volatile markets. I have a slight tilt towards U.S. equities, but may move to more neutral positioning if we continue to see valuations pushed higher.
Within fixed income, I continue to favour lower-duration, higher quality issues. I remain underweight high yield as there may be some more room for selling in the near term.
I continue to watch the credit markets for signs of erosion but was very encouraged by the rebound witnessed in January and thus far in February.
I continue to watch the portfolios closely.