It turns out the most powerful man in the world does not live in the White House but rather sits at the head of the Federal Reserve in the US - at least as far as stocks are concerned. The last six months have seen a wild swing in markets from the depths of year end to a strong recovery in the first quarter - effectively bringing us back to where we were at the end of September. Federal Reserve Chair Jay Powell first spooked the market in the Fall with respect to faster increases in interest rates than hoped. Then in January he backed off those comments, indicating that the path of monetary tightening would be considerably more gradual - given global uncertainties including Brexit, and a trade war with China, to name a few. This was all the market needed to determine that the good times were back.

That rates are having such an impact does not come as a surprise, given the propensity for market and economic cycles to end in conjunction with rising rates. The difficulty lies in the fact that rates are abnormally low and could rise for some time before breaking, what one would consider, an equilibrium level. A cynic might say that Powell succumbed to the pressure of Trump, but the reality is that the level of uncertainty that exists today makes this approach reasonable.

Canadian monetary policy continues to mirror that of its southern neighbour with the Governor of the Bank of Canada, Stephen Poloz, pointing to a more neutral stance in terms of rates. Some economists are even expecting a cut in the central bank rate. Continued trouble in the automotive manufacturing sector in Ontario, coupled with lingering commodity concerns are driving this view. This would be welcome news to Canadians who have been taking on more and more debt, in large part due to a booming housing market. With that said, measures to cool the housing market appear to have worked in slowing certain pockets of growth in Toronto and Vancouver.

In the US, the economy is now a year removed from the Trump tax cuts, and as the one stand-out market in a difficult 2018, it will be interesting to see if it can continue its relative outperformance. More recently, we have seen some weaker employment growth although wages appear strong. Tariffs may start to bite on consumers as this will inherently drive prices higher. And of course, the continued political uncertainty that many have been willing to look past may become more prescient as the economy matures.

Despite the political drama in North America, nothing can match what we have seen in the UK. Brexit is looking more and more like an intractable unforced error that could be doing permanent damage to the UK economy regardless of the outcome. It seems the EU is willing to play hard ball and are holding all the cards at this point, but it should be careful not to do damage to its own fragile growth prospects. In fact, given slowing growth in the EU, a deal with the UK would be very beneficial, if at all possible. From a portfolio perspective, while we do own some UK stocks, we currently have very little direct exposure to the UK economy as these are global companies.

Predicting central bank policy and timing is as difficult as trying to time the market. As Alan Greenspan once famously said: “If I’ve made myself too clear, you must have misunderstood me.” Ironically, a resolution of the trade war with China could very well put the Fed back on the path towards tightening and cause markets to move lower. There are a considerable number of exogenous factors to consider and the resulting reaction would be even more unpredictable. For this reason we continue to take a measured approach with a diligent focus on quality companies, and we remain wary of higher valuations in frothy pockets of the market.