Financial Outlook 2019
Five key trends to watch in the economy and markets in the year ahead.
In January all the talk was about synchronous global growth and the “Goldilocks” economy – not too hot, not too cold. Fast forward to December and the script has flipped. It’s concern over the escalating U.S.-China trade spat and the pace of the Federal Reserve’s interest rate hikes which are taking turns whipsawing financial markets.
This was also the year pot stocks took off and Bitcoin crashed. Canada, the U.S. and Mexico struck an agreement to replace NAFTA, while British Columbians voted on the future of their electoral system.
What will 2019 bring for the markets and your money? Here are five themes worth paying attention to in the year ahead.
1. The global economy: uncertainty trumps optimism
There’s mounting evidence the global economy is entering a period of slower growth. In its most recent economic outlook, the International Monetary Fund revised its 2019 forecast for world output to 3.7%, down from 3.9% in July. Optimism at the start of the year has faded, pushed aside by anxiety over trade, rising tariffs and the strained U.S.-China relationship. At the same time, worried eyes are on U.S. interest rates and the Federal Reserve. In its efforts to keep a lid on inflation, will the central bank go too far in tightening monetary policy and choke off growth?
The good news for the American economy is it’s poised to again outperform the G7 by a wide margin on the back of strong corporate earnings momentum and capital spending, a tight labour market, as well as the lingering benefits of fiscal stimulus.
Still, there are warning signs in the U.S. that weaker growth is in the cards. Rising interest rates coupled with a flattening yield curve is characteristic of a late-cycle economy. Construction spending fell for a third straight month in October. Durable goods orders are softening, while borrowing costs for U.S. companies have risen sharply. Confidence among American consumers hit an 18-year high in September – a measure notorious for peaking shortly before a downturn.
There are challenges for the world economy, too. Germany and Japan contracted in the third quarter, while the eurozone is expanding at its slowest pace in four years. Brexit negotiations remain a serious headwind for the United Kingdom and Europe heading into 2019. The Italian budget crisis has widened the yield spread on Italian and German bonds the most since early 2013 as investors look to be better compensated for holding debt of risky sovereigns. At the same time, trade conflict is further constraining a Chinese economy already burdened by slowing consumption and rising debt.
Where do all the cross currents leave the Federal Reserve? Any hint of prolonged strength in the U.S. economy would make the Fed reluctant to stray from its path to normalizing interest rates. The consensus view is we’ll see a rate hike this month and further increases next year until the federal funds rate reaches neutral, a zone where monetary policy is neither accommodative nor restrictive. But with mixed signals from the economy, it’s looking like it might take fewer hikes to get there.
2. Canada: slowdown ahead?
There continue to be healthy signs for the Canadian economy. The unemployment rate touched a fresh 40-year low in December. Export volumes are solid, while inflation remains above the Bank of Canada’s target. Yet, the changing outlook for the world economy has the Bank striking a more cautious tone, a stark contrast to the confidence officials exuded in October.
As the year winds down, optimism sparked by “NAFTA 2.0” has dissipated. American steel and aluminum tariffs remain an added cost for industry. The abrupt drop in oil prices is hitting crude production. Retail spending is losing steam while consumers contend with higher debt service costs. The escalating U.S.-China trade squabble is pressuring base metals and other commodities. It adds up to a more muted outlook for Canada’s economy in 2019.
3. Interest rates: heading higher, but not as fast
As anticipated, the Bank of Canada held its target overnight rate firm in December – postponing a sixth increase since July 2017 – as authorities monitor domestic economic strength. Expect the normalization process to carry on into 2019, but the Bank’s recent dovish stance and price action in the fixed income market suggests the pace of rate increases will probably slow. The yield on 10-year Government of Canada debt has drifted lower since early November as investors adjust to a less rosy economic outlook. Financial markets are now betting there won’t be a rate boost until March at the earliest.
Less visibility on the economic front, trade troubles and struggling oil prices are likely to keep a lid on the value of the loonie into 2019, particularly if the U.S. economy proves resilient, letting the Federal Reserve stay the course on rate hikes.
4. Vancouver real estate: finding its footing
It’s been a rough year for Metro Vancouver real estate.
November figures released by the Real Estate Board of Greater Vancouver (REBGV) reveal home sales plummeted by 42.5% year-over-year, the lowest volume since the financial crisis and well below the market’s long-term average.
So far, cooling sales volume hasn’t made much of a dent in prices. The cost of a benchmark home in Metro Vancouver is still firmly above $1 million, edging down a mere 1.4% from November 2017. However, that figure hides wide disparities in price performance between neighbourhoods and housing types.
The luxury detached segment has borne the brunt of the downturn, as evidenced by double-digit percentage price declines on Vancouver’s west side and in West Vancouver. On the other hand, townhouses and apartments have held onto average price gains of 2% to 3% across the region. Multi-unit housing continues to have a large affordability advantage over the detached market.
The sharp sales reversal comes on the heels of broader mortgage stress tests, which now capture conventional borrowers, plus government intervention to curb speculation in select markets across the province. Interest rates haven’t helped. Since mid-2017 home shoppers have faced a steady uptick in mortgage rates which has cut purchasing power, particularly among younger buyers.
According to a recent survey of BlueShore Financial members, 53% of millennials say the high cost of real estate has caused them to delay the purchase of a home. Others report having to settle for a smaller home or a residence outside their preferred neighbourhood.
While sales have slumped, listings have swelled. Analysts observe the shifts have created, in aggregate, the most balanced market home buyers and sellers in Metro Vancouver have seen in recent memory. The sales-to-active listings ratio for all property types in November stood at 13.1%. A ratio under 12% for an extended period tends to accompany downward pressure on prices.
Where do we go from here? Despite the pullback in the market, local real estate continues to be anchored by a strong BC economy featuring the lowest provincial unemployment rate in Canada. Central 1 Credit Union forecasts the price of a benchmark home in Metro Vancouver will fall another 3% to 5% before the market finds its footing.
5. Market volatility: likely to persist
Last’s year historically calm stock markets gave way to something else entirely in 2018. The S&P 500 is seeing its most volatile year since the financial crisis, featuring two corrections of 10% or more, something that hasn’t happened in the same calendar year since 1990.
While U.S.-China tensions and Federal Reserve action will continue to drive the narrative surrounding equities, don’t discount geopolitical flash points which could further stress markets as the year wears on, including the growing risk of a “hard" Brexit in the UK or an unexpected outcome in EU parliamentary elections in May.
The bottom line? Be prepared for heightened stock market volatility well into 2019.
Ready for the new year?
Watching equity markets bounce around can tempt you into abandoning your long-term plan. There’s a better approach: see past the headlines and stay focussed on your goals. Being properly diversified and regularly rebalancing your portfolio to manage risk can go a long way to keeping you on track.
In today’s global economy there are just too many moving pieces to leave your financial future to chance. Whether you want to invest smarter, pay less tax, better protect your family’s lifestyle or be more prepared for what financial markets may bring, your BlueShore Financial advisor has solutions that work.
Speak with us to arrange a comprehensive review of your financial plan and start 2019 off right.