12/31/2018 12:00 PM < Back
Portfolio Manager's Commentary year in review

What a difference three months makes! When we last wrote, Canadian and overseas stocks were just above water for the year and American stocks were up about 10%. In the time since, stock markets globally “caught a cold” and dropped rapidly, ending the year in negative territory. Despite the draft felt throughout the financial markets, global economies continued to chug along. 

Global economy


Despite the political drama in nearly all the major European countries – Britain’s Brexit conundrum, France’s Yellow Vest protests, the impending retirement of Germany’s Angela Merkel – the European economies continued to clock along respectably. Italy was the main exception, as last year’s cleanup of its financial system has yet to light a fire under its economy.


Outside of Alberta, the Canadian economy hummed along at a very good pace, with strong job creation through October and preliminary reports from November and December that also indicated a strong labor environment. The Bank of Canada increased its target short-term interest rate three times through the year, bringing it to 1.75%.
Alberta’s economic environment was much more muted as the year came to a close. The late-August rejection of the Trans Mountain pipeline by the Federal Court of Appeal added an unwelcome crimp on the ability of Alberta-based oil producers to transport their wares to buyers, and helped drive down the price of the heavy oil produced largely in the oil sands. By year end a more ominous problem reared its head, as the price of lighter conventional oil fell from a promising $75 US per barrel at mid-year to only $45.
United States

The American economy also rolled along though the fourth quarter, as new job creation remained vigorous and the unemployment rate and unemployment insurance claims remained commensurately low.

In light of the strong economy, the US central bank, the Federal Reserve (the “Fed”), raised its target short-term interest rate four times this year, bringing it to 2.5% by year end. During the December increase, the Fed also signalled that it expects to increase rates only twice next year, though much will depend on how the American economy responds to the rate increases of the past two years.
Financial Markets

Financial markets did not reflect the underlying current strength of the global economy. Instead, prices of riskier assets such as stocks and low-rated corporate bonds declined, and those of less-risky assets such as government bonds rose. Markets reacted as though a recession is imminent.

Despite their late-year rally, bonds couldn’t escape the inherent limitations of a low interest rate environment, and the broad Canadian bond universe return for the year was only 1.4%.

Compass Portfolios

Commensurate with the negative stock market returns and low bond returns, the Compass returns for the year ranged from about a negative half-percent for the most conservative portfolio to just below negative six percent for the most aggressive.
What's next
Stock prices often fall and rise in advance of the broader economy, but also move independently of the broader economy. To quote Paul Samuelson, “the stock market has predicted 9 of the last 5 recessions.”

Instead of attributing the late-year stock price decline to “investor irrationality”, we should also acknowledge that economic indicators measure only the past, not the future, and can deteriorate quickly. For example, in the last two recessions US job growth went from positive to significantly negative in only four months. Furthermore, because North American central banks are raising their target interest rates and “tightening” monetary policy, the chance of a recession occurring is higher than if they were doing the opposite.

Having said that, there are several reasons we don’t believe the broad North American economy is headed into recession. First, neither the Canadian nor the US central bank has expressed any concern about excessive inflation. Rather, both have repeatedly expressed that the goal of the current interest rate increases is to “normalize” interest rates, i.e. to wean the public off the abnormally low interest rates required to counter the 2008-09 global financial crisis and Great Recession. Both central banks want to get interest rates back to neutral levels, not to the high levels - occasionally needed to combat excessive inflation - that can also trigger a recession.

Secondly, the financial system is also significantly stronger now than it was on the eve of the 2008 financial crisis. Banks are far better capitalized, and house prices are not stretched relative to incomes.  

Finally, interest rates remain low by most standards. Borrowers and bond investors represent different sides of the same coin: a high interest rate for the former represents an attractive interest rate for the latter. As investors, we do not find the current interest rate environment very attractive. For example, at year end the 1.96% interest rate of the 10-year Government of Canada bond was lower than the Bank of Canada’s inflation target of 2%.

It is inevitable that at some point the economy will slow at least somewhat, though it need not “fall off a cliff” as it did in 2008-09. Equally important is that at some later point, it will accelerate. The size and timing of both will only be determined well after the fact.


If predicting the exact timing of the economic slowdowns is a mug’s game, and if sizeable stock price movements occur even outside of recessions, then an investor’s most appropriate plan of action is to not spend time and energy trying to predict the unpredictable. Instead, the path to success involves investing in a portfolio with appropriate return and risk characteristics, and then letting time work to one’s advantage.

On average and over time, stocks have generated higher returns than bonds, which in turn have generated higher returns than cash left in bank accounts. The benefits don’t come without strings attached: the last few months provided a cogent reminder that stocks’ higher returns are also accompanied by higher volatility, which can come out of the blue. But as we’ve said many times in this space, and will continue to say, don’t let the inevitable short-term gyrations distract you from your long-term journey to investment success.

Cheers to you in the New Year!
Gene Hochachka
Chief Investment Officer
ATB Investment Management Inc.

This report has been prepared by ATB Investment Management Inc. (“ATBIM”) which manages the Compass Portfolio and ATBIS Pools. ATBSI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). ATBIM, ATB Securities Inc. (“ATBSI”), and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth.

The mutual fund performance data provided assumes re-investment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Unit values of mutual funds will fluctuate and past performance may not be repeated. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATBIM, ATBSI, ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read the fund offering documents provided before investing. The Compass Portfolio and ATBIS Pools includes investments in other mutual funds. Information on these mutual funds, including the prospectus, is available on the internet at www.sedar.com.

Opinions, estimates, and projections contained herein are subject to change without notice and ATBIM does not undertake to provide updated information should a change occur. This information has been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. ATB Financial, ATBIM and ATBSI do not accept any liability whatsoever for any losses arising from the use of this report or its contents.

This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any investment. This report may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.