Market corrections take time to resolve. After a tough month of October, global stock markets had a relief bounce in early November before more U.S.-China trade tensions, fear of slowing global economic growth, declining oil prices, Brexit and so on caused them to retreat again. Markets are now in the process of testing their respective October lows. This type of price development (i.e. initial market decline, followed by an oversold bounce, then a retest of the bottom) is quite normal and is exhibiting characteristics representative of past market corrections.
Beyond this short-term market volatility, we believe the larger fundamental picture remains intact for major global economies. The data and indicators we monitor show that the risk of a global recession is relatively low in 2019. However, the market is not the economy and we can experience a market correction due to excessive optimism and higher valuation without a recession. As long-term investors, we must acknowledge that short-term market volatility is inevitable and is part of investing. During these times, we must not allow our emotions to derail our long-term plan, and conversely, having a cash reserve can allow us to capture opportunities.
At this point, the big question is whether the retest of the October lows will hold and if we can muster a rally into year-end. There are several potential positive catalysts to monitor. The first can occur this weekend at the G20 Summit starting on November 30th in Buenos Aires, Argentina. President Trump and President Xi are meeting to discuss trade talks and if the U.S. and China can come to a more collaborative tone, such as agreeing on a framework or date for further negotiations and holding off on further tariff increases, that would be a positive catalyst for the markets. The second catalyst could come from the U.S. Federal Reserve. Their next FOMC meeting is on December 19th , where the probability of a U.S. rate hike is about 80%, but this has been mostly priced in. What’s more important is their tone and projection for future rate hikes. A more dovish tone and accommodative stance on future increases would be viewed positively by the markets. In fact, we have already seen a hint of that this week when Fed Chair Jerome Powell took a dovish stance in his speech at the Economic Club of New York.
Lastly and close to home, a rebound in oil prices from extreme oversold territory would bode well for Canada and other oil-centric economies. The OPEC nations and Russia are expected to meet on December 6th and have hinted at cutting oil production by about 1.4 million barrels per day to address the current oversupply issue. If enacted, it could be a positive catalyst for the markets. Let’s see if Santa will pay us an early visit this year and give markets a year-end rally.
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