Markets suffered their worst week in 2019 as the US-China trade war escalated. Is a recession on the horizon? Anthony Okolie speaks with Michael Craig, Head of Asset Allocation, TD Asset Management.
- So let's start off with the deep sell-off that we saw on Monday. It was the worst trading day for Wall Street this year, and last week was a worst week for 2019. So I think the big question on people's mind is, is the sell-off over?
- So we maybe a step back to last Wednesday. The Fed came in and cut it as markets were expected. However, Powell was a little bit clumsy in his press conference. First, he hinted that there would be no more cuts, and then maybe there will be cuts. And the market didn't like that.
And ultimately, what happened the bond market is longer term bonds rallied and shorter term bonds sold off, flattening as we call it. This is not a-- this is basically a failing grade for the bond market. Because the expectations for future growth were lower, so we started off on a bad footing.
Then you had Trump's tweets, another 10% tariff on $300 billion of Chinese goods. And ultimately, you had kind of a troubling market now get kind of amplified by his noise. And since then, there has been no de-escalation of the tariff and trade dispute between the US and China. And so rightly so, the market's concerned and has sold off fairly rapidly.
- And do you see the markets correcting?
- So we've sold off now 6%. Another 4% would be a garden variety correction of 10%. We would expect things to be fairly volatile over the remainder of August and certainly into early September. Both sides seem to be dug in a little bit, and so we're going to go through a period of time that's going to be a bit more volatile, a bit more uncomfortable. But from our perspective, it's periods like this that typically open up opportunities for those who are looking with a longer time horizon for owning assets that have since cheapened up.
- And do you see a potential risk of a global recession?
- So certainly, the certain markets are telling you that we are perhaps heading towards a global recession. Our opinion is no. We believe that--
- And why is that?
- --US growth will be well under trend. So trend US growth is-- I call it 2.5% real. It will be lower. It will be on a one handle for the second half of this year, and this is not uncommon. And in expansions, you have these periods of time when growth slows. We saw this in 2015.
But ultimately, next year as we see more and more Fed cuts, and we believe that they will continue to cut. We will stimulate the economy, and it will go into more of a reflationary backdrop in 2020. So a slowdown, this is typically led to equity markets being muted, not negative, lots of volatility. But we're looking for a rebound into next year. And by the way, this year, markets are still up 14%. So it hasn't has been a terrible year for equity investors to this point.
- So you don't see a recession, but is there a potential for impact on global economic growth outlook?
- So it's going to be a bit scattered. Economies that have really relied on exporting are really hurting right now. South Korea, Taiwan, Germany, and parts of Europe, they're going through a tough period of time. Because they just don't have the domestic demand to meet their exports, and so they've been really relying on other countries to purchase their goods.
With all this noise with trade wars and tariffs, these are the countries where we see the greatest risk. And as our Wealth Asset Allocation Committee has been underweight, Europe and Japan, particularly in favor of the US. So I think those are areas we'd like to avoid. We are quite sanguine towards US. This is the center of productivity. US companies are the best managed companies in the world, and so I've really had a focus on this part of the world.
And then in Canada, our trade is, generally speaking, balanced, fairly productive workforce, and a stock market that's relatively inexpensive. And so neutral in Canada. But with the bias perhaps of looking for some opportunities here as we think that on a valuation basis, this is more and more attractive for global markets.
- And you mentioned volatility. Do you expect volatility to increase through the rest of the year?
- So this is a very interesting question of vol, and it's important to be a bit more pedantic about it. In the '90s, vol was very high and consistently high. So you just kind of got used to it. The challenging thing with this market is we go through periods where vol is sleepy and not much is happening. And it's almost-- it can lull you into a false sense of security. And then you have episodic events of vol that are quite rapid and quite painful.
And we think this is likely to continue, and so we're in a period now where vol is elevated. I don't expect this to come right back down at some point in the near future. But looking ahead, there's some major events on the horizon that could lead to other spikes in vol. Brexit in October continued strained relations between the US and China. And of course, the US election in 2020. All major events on the horizon that are going to lead to an elevated vol environment.
- Michael, thank you very much for your time.
- Thank you for having me.