Increased general levels of volatility and uncertainty persisted through the second quarter in spite of strong fundamental economic growth and solid corporate earnings. In Canada, the economy has shown itself to be resilient in the context of strained consumer demand and ongoing uncertainty regarding the status of our trading relationship with the U.S. A recovery in energy prices during the quarter was a welcome relief for western Canada and strong manufacturing and employment growth has helped, so far, to mitigate the impacts of the escalating trade rhetoric.

As a trading nation with total trade equivalent of over 60% of GDP, Canada is significantly exposed to any retracement in our trading relationship with the U.S. Threats to NAFTA, the Canada – U.S. Free Trade Agreement, the 1965 Auto Pact and targeted tariffs on agricultural, industrial and manufactured goods pose a significant threat. Trade disruption also poses a threat (albeit a lesser one) to the U.S. economy as Canada is the largest export market for many U.S. industries. While we hope that cooler heads will prevail, we will be monitoring developments on global trade closely.

Here's what we expect to see in the second half of 2018:


Synchronized global growth continues, despite volatility

Broad-based growth continues to be generally solid but less uniform across geographies. The underlying fundamentals supporting economic expansion remain intact. Volatility should continue for the remainder of the year, but we expect the market to maintain an upward trajectory.


Inflation and rates to drift upward

Inflation is slowly drifting higher in most developed economies and will likely continue to do so, although inflation expectations remain well contained.


Dispersion among stocks to increase

We continue to observe this trend. Active and long/short equity managers have had good success this year, although we note that “value" managers as a group have been significantly underperforming the broader markets here and abroad.

Be cautiously optimistic, but vigilant in monitoring risk
Maintain a long-term perspective

Though concerns surrounding trade and geopolitics are increasing and eroding market confidence, economic and company fundamentals appear strong. We continue to recommend that our clients maintain their long-term perspective and remain at or slightly above their target equity allocations.

Ensure you are diversified

While we're confident in the market environment, geopolitical events have an increasing likelihood of exacerbating volatility. Investors should anticipate periodic draw-downs.

Take advantage of active management

The increase in dispersion among stocks should provide a good backdrop for active managers to select stocks with the potential for strong performance.

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