Market View

Quarter 1, 2019

What WorkedWhat Didn't
Energy StocksNatural Gas
Technology StocksGold
Cannabis StocksGrains

Equity Markets First Quarter% Change (in Cdn$)
S&P/TSX Composite   13.3%
S&P 500   11.2%
MSCI/EAFE     7.7%
MSCI/EM     7.5%
TSX Energy   15.6%
TSX Financials   10.4%

Bond Markets First Quarter% Change (in Cdn$)
FTSE  Canada Universe Bond Index    3.9%

 New Format

Regular and long-time readers of our Commentary will notice that we’ve changed our format.  We feel the new version will provide a more in-depth insight into our thoughts.  The biggest change is there will be one commentary with input and contributions from all the partners, as opposed to each partner writing a section.  We hope you find it useful and informative and as always should you have any thoughts, suggestions or ideas on how we can improve our communication, please let us know.

Recap of recent market activity

 After a wild, woolly and sharply down finish to 2018, the first quarter of this year provided a much different result.  The major stock market averages were strongly ahead as the TSX appreciated over 13% and the S & P 500 Index in the US was up over 11% in Canadian dollars. Of interest, the volatility so evident in the month of December 2018 was essentially non-existent in the first quarter.  The averages were up, and up smoothly, a pleasant change from last fall.

In Canada, the stock market was led by the oil and gas sector which was ahead 15.6% as measured by the TSX Oil and Gas Index.  The US market was lifted by things technology.  Not just the FANG stocks that were so dominant in recent years, but investors were certainly paying up for companies that demonstrated they could integrate technology into their business with positive results.

Fixed income markets were generally stronger as the threats of rising interest rates, so prevalent during 2018, dissipated.

Looking ahead

The rate of global economic growth is slowing at time of writing in early April, but, is still positive, especially in the US.  However, the US growth rate appears to be encountering some headwinds and an economic recession is now in the forecast of several well-respected economists.  Due to past expansionist policies, if a recession does occur in North America, most governments will find themselves with a reduced arsenal of tools to effectively combat a recession.  Most notably governments have historically high debt levels meaning running a big deficit could well come with the penalty of lowered credit ratings and eventually higher interest rates.

Market expectations

Fixed income

For the first time in a long while, interest rates in North America became inverted during the past three months.  Historically, a precursor to a recession has been when short term interest rates are higher than long term interest rates (called an inversion) and that might well be the case again. However, it is worth noting the recent inversion only lasted a few days and was caused by market forces as opposed to government intervention. We will see if the different type of inversion makes for a recession or not but, either way, we are not expecting big moves in interest rates any time soon and will be staying cautious with our fixed income investments.



Canadian bank performance has lagged that of the US banks.  Notably the real estate markets in Vancouver and Toronto, long bastions of ever stronger prices, are showing signs that prices are finally topping out and or declining.  Should that process continue then the financial results of the Canadian banks will suffer.

We have more capital invested in the US banking system than in Canada and that continues to be a pleasant experience as the corporate results in the US have been, for the most part, quite solid.  Non-bank financials have been spotty, as insurance companies and money managers have not had over whelming performance.

Interest sensitive

For most of 2018, interest rates, as measured by the central bank rate in the US, were either trending higher or very much expected to head higher meaning that interest sensitive investments, banks, utilities and pipelines were poor performers.  We have significant capital employed in those areas as they are stable, conservative and provide solid dividend income – all very appropriate traits for investors who don’t want to expose their capital to undue risk.  Since the turn of 2019, the economic forecasters have started to speak about the possibility of the global economy continuing to slow.  It follows that interest rates are now expected to be static or perhaps even fall as the year plays out.  The recent strong performance of the interest sensitive areas can be expected to continue, as long as there isn’t a debt level shock, until either inflation ramps up or the economy in the US shows considerable additional strength.

Non-North American

We hold interests in some excellent businesses outside of North America, including Diageo, Kheune & Nagle and Kone.  They have continued to perform well in spite of the clouds hanging over the economic performance in Europe and the Far East.  Europe has the additional uncertainty of how the Brexit mess will be sorted out.

China’s economy, if one believes the Chinese government, has maintained a GDP growth rate in the 6% -7% range.  However, the Chinese government has been adding strong stimulus to keep that going. We are comfortable with our global holdings and are expecting continued strong performance.  When and if a recession occurs outside of North America, we will react accordingly.

Market Changes

We’ve witnessed a change in the dynamic of the equity markets over the last few years.  Technology has had a significant effect on the investment world.  Not just with the arrival in the public domain of firms like Apple, Amazon and Facebook, but in the amount of information available to investors.  Several of us at Portfolio Management are old enough to remember when even basic information, such as annual and quarterly corporate statements, was difficult to acquire on a timely basis whereas now the world knows everything in moments.  To say this hasn’t affected the investment process is ludicrous.

Among other issues technology has allowed for the proliferation of Exchange Traded Funds which have caught on with investors who are attracted to the low-cost market participation.  Never mind the fact that ETF’s package the good with the bad, the operative fact is they have become popular and are having a significant effect on market results.  Specifically, the volume of money now being invested through ETF’s is very large and that has pushed most ETF operators into investing predominantly in larger companies.   Larger companies naturally have more shares outstanding versus smaller companies and, generally, provide easier access in or out of the market. In street parlance they are more liquid. The big money is moving towards investing in large companies through ETF’s which has several implications for the market and how the various components behave.  Not surprisingly larger companies (Large Cap stocks in street speak) have been outperforming their smaller cap cousins and we feel it’s time we evolved along with the market to best offer the benefits to our clientele.  To that end we would expect to be favouring large cap companies when making investment decisions going forward. We would be pleased to discuss this along with any other issues that may intrigue you so please don’t hesitate to call us if things financial are on your mind.


On June 15th we will be moving from our long-time home at 4 King St West to:

130 Adelaide St West Suite 3401

Toronto Ontario M5H 3P5

All our phone numbers and email addresses will stay the same.

Other Markets

Fixed Income  March 2019  December 2018
Cdn 91 day T-Bills 1.65% 1.67%
U.S. 91 day T-Bills 2.41%  2.42%
Cdn 10 year Bond 1.55% 1.95%
U.S. 10 year Bond 2.41% 2.69%
Commodities (in U.S.$)  March 2019  December 2018
Oil 60.14 45.41
Natural Gas 2.66  2.94
Gold 1298.50 1284.30
Currency  March 2019  December 2018
Cdn/USD 1.3348 1.3645
Cdn/Eur 1.4973  1.5642