December 2018

Monthly Equity Monitor

Highlights:

“After a promising rebound in November, global equity markets fell back early in December. The outlook for earnings growth remains uncertain. The good news is that at the G20 meeting in Argentina December 1, the U.S. and China agreed to a trade truce. The bad news is that 90 days is an extremely short time to negotiate a new trade agreement between two superpowers.”

• “Despite a fairly benign economic outlook in the U.S., equities continue to tread water at this writing. What gives? Markets were taken aback by the inversion in December ofthe 2-to-5-year portion of the U.S. yield curve, a first since 2006. Historically this is a signal of economic slowdown or contraction in the subsequent 12 to 18 months. False alarms of recession have happened but, in these cases, the curve righted itself after a Fed rate cut. So, we cannot exclude a turnaround by Mr. Powell in the coming months, or at the very least a much more dovish tone.”

• “At this writing theS&P/TSX is down more than 8% from the beginning of 2018. As long as Energy(18% of the index) and Banks (23%) continue to struggle, the Canadian benchmark will remain challenged. On the energy front, the spread between WTI and WCS has narrowed quite significantly in recent weeks with the end of temporary shutdowns at key U.S. refineries and the announced production cuts ordered by the Alberta There may still be light at the end of the tunnel.”

• “Our asset allocation is unchanged this month. We prefer at this point to remain cautious in the run-up to the December FOMC meeting. We would be ready to redeploy more of our excess cash position if the Fed would first set the stage for U.S.dollar depreciation and a steeper yield curve by turning more dovish. Our sector allocation is also unchanged this month with a bias towards resources.”

*** This extract from Monthly Equity Monitor, Highlights, National Bank, Financial Market, December 2018.

Stéfane Marion

Chief Economist and Strategist

Matthieu Arseneau

Deputy Chief Economist

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