Stock rally stalled
This year’s powerful stock-market rally took a step back late in the quarter. A recession or an escalation in tariffs would likely lead to lower stock prices. However, our analysis suggests it wouldn’t be unreasonable for equities to deliver single- to low-double-digit gains in an environment of low interest rates and inflation should those fears not play out.
Aging business cycle
Our late-cycle assessment is based on a number of signals, including the low U.S. unemployment rate, demand for credit and the inverted yield curve. The economic expansion is nearing the longest ever.
Global growth outlook
The global economic backdrop is mixed, but weighing the positives and negatives suggests that the trajectory for global GDP is not that bad. We have raised our global growth expectations slightly as a result of a potentially rising economic speed limit and supportive governments and central banks. Protectionism still remains the most significant risk to the economy.
Executive summary
The global economy is encountering challenges from protectionism, a maturing business cycle and fading U.S. fiscal support, but is being helped by stimulative government initiatives outside the U.S. and lower interest rates everywhere. Against this mixed economic backdrop, our base case scenario anticipates further advances in equity markets, although with perhaps less thrust than at earlier points in the cycle.
Debt-service costs rising for Canadian households
The foreign-exchange world has been quiet
U.S. dollar has moved steadily higher
Asset class commentary
Last quarter, global financial markets delivered mixed performance as economic growth, which had been slowing, steadied at a moderate pace. New economic green shoots that emerged during the quarter were inhibited by an intensifying trade dispute between the United States and China, which eroded stock market gains. Nevertheless, credit markets remained reasonably healthy and economic growth is expected to pick up over the next year in the longest post-war recovery on record.
Economy
The global economy is encountering challenges from protectionism, a maturing business cycle and fading U.S. fiscal support, but is being helped by stimulative government initiatives outside the U.S. and lower interest rates everywhere.
Fixed income
Central banks have abandoned their prior tightening agendas and markets are pricing in the possibility of rate cuts. We expect no change to policy rates in most major developed markets over the coming year, but if we are wrong it’s likely because rates move lower.
Equity markets
This year’s powerful stock-market rally took a step back in May after trade tensions between the world’s two largest economies intensified.
Emerging markets outlook
Emerging-market equities had good momentum in March and April but corrected significantly beginning in May, driven by the escalating trade war between China and the U.S. The trade conflict resurfaced in the headlines after the U.S. announced in early May that it would hike tariffs on US$200 billion of Chinese goods to 25 percent from 10 percent. Emerging-market equities were up by more than 12 percent between January and April, but after the May selloff, the gain for the year came down to about 3 percent in U.S. dollar terms.
