Markets - Year End 2018

So what's happening now?

There have been compounding factors leading us to where we are today.


  • ALL markets were down in 2018.

  • THE US market was the primary driver in 2018 and this was constantly interrupted by wavering views from the White House. The tariffs being imposed on China, Canada and the Eurozone are a negative overriding factor.

  • THE on/off promises of a resolution with China get reflected in these wide market swings we have seen lately.

  • THE closure of the US Government has put a cloud over the President's inability to get his wall built and paid for by anyone.

  • THE investment community is trying to make some sense of where things will land and the President's tweets make people nervous and stock prices are impacted.

  • ADD to this the intent of Central Banks (Federal Reserve, the Bank of Canada, etc.) to raise interest rates has added some concern.

  • BREXIT being unresolved is another factor.

  • A GLUT of oil with reduced prices has had serious consequences for Alberta with a ripple effect on the rest of Canada.

  • The US S&P 500 Index was down 6.24 % in 2018 or about a negative 8.4% when converted to Canadian Dollars.

  • The TSX was down 11.64 % last year. Prior to that, the Canadian market has seen recent downturns in 2015, 2011 and of course 2008.

We weathered all of those fluctuations and we will this one.


  • Markets Drop every three to four years.

  • GAINS in UP years are much greater than losses in DOWN years which is why we have confidence over the long term.

  • AS it is impossible to predict which markets or for that matter which sections of markets will do the best in any given year, we promote diversification in everyone's portfolio. This lessens downside risk and creates more stable returns over time.

MACRO factors impacting returns:

  • THE biggest thing is the president's incessant tweets have caused market fluctuations based on 'suspect' information.

  • THE only major thing he achieved in 2018 was to pass a tax bill for Corporations that allowed them to move back large sums of surplus money from offshore with little or no tax on the transfer. The intent was to have this cash sitting offshore moved to the US and those companies in turn would start investing in new Capital Projects and cause new job spin-offs.

  • INSTEAD, what a lot of companies did, was use this excess cash to buy back a portion their own company's shares.

  • THIS may have been great for shareholders but the bigger message was the companies didn't see an investment opportunity.


  • THE recent round of tweets in the last week of 2018 seemed to centre around the Federal Reserve which is the USA's Central Bank. Our Canadian equivalent is the Bank of Canada. Their purpose is to control inflation and assist the economy through the maintenance of responsible interest rates.

  • INTEREST rates get lowered when the economy is sluggish. These lower interest rates encourage people and companies to borrow for expansion or to stimulate the economy.

  • INTEREST rates get raised to try and slow down a economy that may be growing too fast or where inflation is getting above their desired 2% maximum.

  • LET'S step back to 2008 and 2009. You may recall the phrase Quantitative Easing. This was essentially two things: 1) lowering interest rates to stimulate growth and more significantly 2) printing money to buy those Mortgage Backed Securities (MBS).

  • WHAT happens when a central bank buys MBS investments is to put actual money back in the hands of banks thus giving them extra cash (i.e. Liquidity) so they can start lending again. The money previously tied up in MBS investments reduced the banks' cash reserves and lending flexibility. This injection of cash at the time was an excellent decision. In addition it helped create jobs which at that point had the highest unemployment rates in decades.

  • DID that strategy work? Yes it did. Fast forward 10 years and the US and Canada both have the lowest unemployment rates seen in decades.

  • SO now that both countries have reached close to full employment levels it is an ideal time to raise interest rates.

  • IN the US it is also an excellent time to start selling back the MBS assets it has on the Central Bank's books. They bought them at a discount but they can't stay on their balance sheet indefinitely. It seemed like an idea time to start dealing with these MBS assets when the economy is running at full employment.

THE question is when is the right time to raise rates? If not now then when?


  • IN order to have flexibility to handle future economic uncertainty the central banks (read US Federal Bank and the Bank of Canada) need to increase rates. They are still at historic lows and the Central Banks' ability to handle future negative economic events is lessened. Homeowners don't like upward changes in rates as mortgage rates will increase. Businesses don't like it as higher interest rates mean lower profits.

  • FUNDAMENTALLY you can't have it both ways: a hot economy and low rates. So the Central Banks are right to do what they are doing.

  • THE President is upset because his other initiatives haven't had any real positive impact and rising rates negatively impact the market. Remember, it took Obama and the Federal Reserve two terms (8 years) to get the economy rolling and the current leader has been reaping the benefits of those long term efforts.

  • JUST a couple of weeks ago when the US Secretary of Treasury began calling the large US banks to ask them if they are liquid (meaning do they have cash to lend) it was counterproductive. But actions like these spooked the market because the implication is they were not liquid and, like many things in this administration, the result was negative.

  • THE major US banks confirmed they were in good shape but the market drop damage was done.

  • Trump's foray into calling out the Federal Reserve Chairman is a smoke screen and is a disparaging move designed to deflect negative attention away from himself.


  • OIL Prices have dropped to the lowest level in years. This in part is due to the President supporting the coal initiative in the US but more importantly it reflects the oversupply in world markets including increased fracking in the US.

  • CANADA gets squeezed once again and this gets compounded by our limited access to markets. Alberta has limited pipeline capacity (west and east). Now they're waiting for new rail cars to be added to the train fleet. At best this is a medium term solution.

  • Were you aware the only real oil pipeline capacity from Alberta flows to/through the US.

TRADE WARS and Tariffs:

  • Tariffs harm everyone.

  • This constant bickering has cast a shadow over international trade - this what's next, who's next mentality simply conjures up negative overtones that make markets nervous and markets contract.

  • The recent closure of the US Government goes to show the President's negotiation skills to have Mexico pay for the wall have been futile.

  • Now Americans will pay for the Wall assuming any bill gets passed. Rack up another failure for the President. Plus I'm pretty sure the 800,000 Federal Government employees who are not receiving pay are pretty excited about this too.

  • SO let's see, the Government isn't working, the US Citizens may end up paying for the wall, the tariffs on goods coming into the US are going to be paid for by US citizens, the corporate cash repatriation didn't work, middle class Americans are paying more and will pay more again when the tax bill expires.

  • He did accomplish higher tax free Estate limits for the rich from $5 Million to $10 Million. In addition, the real estate sector got some tax breaks (I wonder why).


  • LOOKING at this stockpile of things the markets got nervous and reacted very negatively.

  • IF markets hate anything it is uncertainty.


  • WHERE the Central Banks have interest rates they can manipulate to achieve their goals Governments can increase, reduce or eliminate Deficits to support sluggish economies.

  • IN a normal environment say, post 2008, the economy was in trouble. It made perfect sense for Governments to create or expand their deficits for job creation.

  • THE theory is when times are good the deficits are turned into surpluses and these surpluses pay down the previous deficits as best they can. By getting closer to a no deficit situation the Government positions itself for proactive response when times get tough again.

  • THE general stupidity of both the Canadian and American Budgets is they both are hell bent on continuing deficits when times are good. This leaves less room to maneuver when times get worse and unemployment starts to rise.

  • IMAGINE that, a Government uses our money to fund more excess in good times and then has limited flexibility to borrow when times get tough.

  • But then as we've heard, "Budgets balance themselves".


  • If you assume a short term 5% drop in your portfolio because of its diversified nature then further assume at 65 you would withdraw around 6%.

  • Imagine you had started with $100,000 and it paid out $6,000 per year. A decrease of 5% would mean $300 a year or $25 per month before tax or say $15 after tax at a 40% tax rate.

  • If your account size was $500,000 then your monthly after tax income drop might be $75.

  • THE conclusion to be drawn is normal down markets don't create serious issues.

  • THAT doesn't mean we have to like down markets we just have to put things in their proper perspective.


"The market is trying to find an equilibrium between earnings, revenue growth and the economy, but when you have an onslaught of headlines that just manifest uncertainty from Washington, it just feeds negative sentiment."

Quincy Krosby, chief market strategist at Prudential Financial. (A quote taken from the Globe and Mail.)


  1. THE Central Banks are on the right path.

  2. GOVERNMENTS need to be more responsible with low or no deficits in good times and we are in good times right now.

  3. TARIFFS are bad for everyone.

  4. THE American people will see their personal costs rise as tariffs get added to the goods they buy. These tariff increases will outstrip wage increases. The US economy will be hit negatively with 800,000 employees not getting paid. That represents over 3.2 Million people assuming a four person household or about 1% of the US population.

  5. BUT overall, investors who hold solid, diversified funds, over time, have always recovered.

Best regards,

Harrison Robbins, BBA, FCPA, FCA

#Markets #Trump #Tarriffs #oil #tradewars

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