Market volatility has spiked as global trade tensions and recession fears mount. Kim Parlee speaks with Michael O’Brien, Managing Director and Portfolio Manager at TD Asset Management about the key headwinds markets will face in 2019.
Hello, and welcome to "Money Talk" and the first show of 2019. Investors will remember 2018 as the year of extreme market volatility. Case in point-- the Dow has swung 1,000 points in a single session only eight times in history, and five of those were in 2018. So far in 2019, we've seen a 700-point intraday drop followed by a 1,000-point rise the next day. So should investors buckle in for a wild ride in 2019?
Joining me today is Michael O'Brien. He's managing director and portfolio manager at TD Asset Management. We're going to talk about this and a number of other things that we saw in the markets. Nice to see you.
Yeah. It's great to be here.
Let me start with-- we'll get into the general markets and what you see. But let's just start first with the Bank of Canada today. We heard from the Bank of Canada governor-- pausing, but looks as though there could be some more rate hikes in the future. Anything surprising or notable in what he had to say?
No, I don't think it was terribly surprising. Like you say, indicated-- they went to great lengths to demonstrate that they're on top of all the different issues out there that people are concerned about. And they paid lip service to Canadian oil prices, US-China trade. They marked down their growth forecasts for 2019. So clearly, they're being cautious here.
But like you mentioned, at the tail end of it, they're still clearly aspirational hawkish, by which I mean they'd still love to sneak in a couple interest rate hikes over the course of the year if markets will let them get away with it. I don't think markets are in any mood to let them get away with it in the first half of the year. But that's where their mindset seems to be.
It's interesting today. And we'll get out of the daily movements. But today, of course, we had the markets rise a little bit more-- and I say all markets-- North American markets on US-China trade optimism, but also the Fed minutes which came out today, which seemed a little more dovish, perhaps. I think people were a little more excited about that. Anything interesting from the Fed standpoint that you're watching?
Well, to your point, that's exactly what they've delivered over the last-- not just today, but over the last couple of weeks-- is a message that they've got the markets back, essentially. If you think about the new Fed Chairman, Jerome Powell, got off to a bit of a rocky start. He and the microphone didn't get along so well to begin where a couple of his comments were construed as being overtly hawkish, and they've had to walk that back.
But I'd say they seem to have corrected the communication issues, and they've sent a very clear signal that they're listening to what financial market concerns are, and they're going to basically, to your point, be very dovish and very cautious, at least for the next couple of quarters.
Do you think they may have gone too far the other direction? I heard some people saying today, well, shouldn't you be looking at the data, not the markets? And the danger, I guess, is setting that expectation that they are going to have the markets back, and then not would be a terrible surprise.
Well, certainly if the economy accelerates further from here and you see inflation ticking up, then armchair quarterbacks or Monday morning quarterbacks are going to say, yeah, you got too distracted by financial markets. But in the here and now, this is exactly what certainly equity markets wanted to hear.
Let me give you-- and I know you know this better. I'm going to sound like the Bank of Canada listing off all the issues here you that you just said. But we've got global trade tensions, the Fed Reserve concerns about a global economic slowdown, some German data that came out, Brexit deal uncertainty, the US government shutdown, split Congress, government shutdown in the States, and of course oil, which has rebounded here in Canada. What are you watching right now from a market perspective? What do you think are the most notable things?
I think the simplest way to sum it up right now is I think everybody is trying to discern just how fast the global economy is decelerating. It's clear that something has changed. It's clear that the pace of growth, both inside North America, but especially outside North America, is decelerating here. And so I think really, everybody is trying to get a handle on is this just a run-of-the-mill mid-cycle slowdown, or is this something more nefarious? So that's really what people are exercised about these days.
And can you answer that question? Is this a slowdown, or is this more nefarious?
I'm in the slowdown camp. I don't think we should have a recession in 2019. It's not my base case. I think the way we get into a recession in 2019-20 is through a policy mistake or a series of policy mistakes. But to your point, the messaging from the Fed in particular gives me a bit of assurance that at least on the central bank side, they're starting to respond to financial market concerns here.
I think what's really interesting about what you're saying, too, is I think the markets are very fixated right now on US and China and will this deal get done. I know it's a behemoth. It's huge. But I think maybe-- is it clouding the fact that there's just a general slowdown happening at the same time? Which of those-- I don't know if it matters to say which is more important. But which one do you think trumps the other?
Which one trumps the other?
I didn't mean to say that.
Well, I think the one is creating the conditions for the other, by which I mean I think it's this massive uncertainty that the current White House, that the Trump administration-- this massive uncertainty that they have created in the minds of investors that is really doing a number on investor confidence. The US-China trade negotiation is the most obvious manifestation of that, but you've still got wildcards, like what are they going to do with-- are they going to tariff German automobiles, or are they really going to sign the Canada-US-Mexico or US-Mexico-Canada, whatever they call it--
The new NAFTA.
The new NAFTA. So I think it's this uncertainty that's emanating from Washington is really creating great difficulty for investors and handicapping how all this is going to play out. And certainly, if the US-China trade and tariff negotiations deteriorate, that would be a material negative for the markets and material negative for the real economy as well.