2018

Year in Review

It was only a matter of time until global markets faced

a downturn. After years of gains, equities sold off in
2018, with the S&P/TSX Composite Index falling by
11.6 percent and the Dow Jones Industrial Average
declining by 5.6 percent. The last 12 months were
marked by increasing volatility, trade uncertainty,
crude oil complications and, in the last quarter, slower
company earnings growth. It was a wild ride to say
the least. Fortunately, investors were reminded of an
important lesson: Markets rise, but they fall, too. Here’s
what happened in 2018.

Crude, cannabis and technology were just some of the big market-moving stories in 2018.

Canada: Crude causes problems

Canada may be a diverse nation, but when it comes to
our stock market, three industries – energy, financials
and materials – determine our returns. While all three
were down this year, energy was hit hardest, with the
sector falling by about 29 percent. The decline was
due to falling oil prices: West Texas Intermediate crude
plummeted by 36 percent over the last two months,
while Canada’s own crude price hit record lows. Signing
the Canada-United States-Mexico Agreement did
remove some trade-related uncertainty, and cannabis
stocks helped buoy domestic markets earlier in the
year, though most gave back their 2018 gains
post-legalization.

The United States: Trade and tech troubles

It looked as though it would be another good year for
U.S. markets. America’s economy was booming, its
stocks were rising and equities weren’t being impacted
by political tweets or turmoil. That changed in October
when people started getting increasingly worried about
the country’s trade war with China – it put 10 percent
tariffs on $200 billion worth of Chinese goods in 2018 –
and its potential for future economic growth. The FAANG
stocks, Facebook, Amazon, Apple, Netflix and Google,
which had been driving markets higher for years, started
to plummet as nervous investors began taking profits.

Interest rates: Central banks tighten

The Bank of Canada (BoC) and the
Federal Reserve continued to raise 1.75%
rates last year, with the BoC increasing Canada’s key interest rate.
Up from 1% on
its overnight rate three times and the January 1, 2018.

Fed boosting the Fed Funds rate four

times. Both central banks raised rates at a faster pace
than they have in the past. Why?
To ensure inflation stays in check
and North America’s economy
doesn’t overheat. Rising rates,
though, can negatively impact
markets, because bonds start
becoming more attractive than
certain stocks, while companies
and consumers, now facing higher
borrowing costs, rein in spending.
Expect more hikes in 2019.
Stephen Poloz, Governor of
the Bank of Canada

Earnings: Strong, but slowing, growth

Overall, it was another great year for corporate profits,
with many companies growing earnings by more than
20 percent. However, earnings expansion slowed in
the latter part of the year, dropping to an estimated 12.8
percent in the fourth quarter from 25.7
percent in the third , according to
20.3% FactSet. While that’s still a solid number,
that decrease made investors nervous.
Estimated earnings
growth for U.S.
companies in
2018. (Factset) With tariff-related costs rising, the tax
cut–driven earnings boost a thing of the
past for U.S. companies, and with lower oil prices
putting pressure on Canadian energy companies,
earnings on both sides of the border could slow
further in 2019.

Volatility: Ups and

downs continue
One word can sum up
2018: Volatility. After a
strong start to the year,
markets tumbled, climbed,
dropped, rose and plum-
meted. The VIX, an index
that’s used to measure
market volatility, climbed by 130 percent, after hitting
record lows in 2017. The ups and downs will likely
continue this year, though that’s not necessarily a bad
thing. Historically, low volatility is not the norm – what
markets experienced in 2018 is more typical. With
trade issues continuing, interest rates rising further in
2019 and investors tempted to take profits after years
of gains, volatility will remain.

The Year in 14,322 23,327

Numbers S&P/TSX Dow Jones
As of December 31, 2018 Composite Index Industrial Average

$45.41 $0.7427
Price of West Texas Year-end CDN-USD
Intermediate crude exchange rate

2% 3.7%
Estimated Canadian Estimated global GDP
GDP growth in 2018 growth in 2018 (IMF)
(Bank of Canada)

Your Investments
Long-term, diversified investing is key
While no one likes to see returns decline,
there are some lessons to take away from
the year that was, observes Bill Chornous,
Senior Vice-President of Investment
Strategy at IG Wealth Management.
Firstly, investors have been
reminded of the importance of
diversification. “You need to be
in a globally diversified portfolio,
which is something people may
have forgotten as the market has
climbed,” he says.
Secondly, maintain your focus
on the long-term. Volatility is no
fun, but investors must stay the
course. “It’s easy to say I want
to get out,” he notes, “but no
one can predict when to get
back in.” Bill Chornous,
Senior Vice-President of Investment
Strategy at IG Wealth Management

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