Markets rebounded in the first quarter, earning back most of the fourth quarter's losses as the end of the U.S. government shutdown, improved valuations, hints of a resolution to the U.S.–China trade dispute and softer messaging from central banks (led by the Federal Reserve in the U.S.) calmed investors' nerves.

The Canadian equity market had a very strong quarter, rising 13.3%; the U.S. market rose 11.6% and international markets rose 7.9% (all in $CAD). The Canadian bond market also posted a very strong 3.9% gain for the quarter.

Slowing but positive global growth

Although we expect a deceleration, the long economic expansion should continue through 2019.

Continued central bank tightening

Central banks have pushed any attempt to “normalize" interest rates at least into the second half, putting this theme on hold.

Interest rates and inflation drift higher

We expect to see some cost pressures emerge this year on the labour front, lifting overall inflation modestly, while we expect rates to slowly retrace some of the drop experienced late in 2018 and early this year.

Moderate equity returns

Although earnings growth will slow from 2018's pace, equity prices are not unreasonable given the low-inflation environment. Improvements in earnings later this year should help to support equity prices.

Persistent volatility

Volatility returned to the market with a vengeance in 2018, and we expect to see more of these episodes going forward. There are plenty of geopolitical uncertainties ahead, with the potential to bring good or bad news as they unfold.

Continued optimism over the medium term
Little sign of a recession

We continue to see little sign of recession over the next 12 to 18 months, and continue to remain optimistic over the medium term.

Possibly more room to grow

While forward-looking estimates (from the Congressional Budget Office) for potential economic output in the U.S. have been continually revised lower, the actual decline experienced in the great recession has left output below all of these estimates.

Allow for flexibility given ongoing risks

We continue to favor global over Canadian equities as geographic diversification remains important. Slowing growth and political risk leads us to recommend that our clients remain at or near to their target asset allocation in equities.

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