The lazy days of summer were anything but during the third quarter of 2018, especially here at home. Justin Trudeau and Chrystia Freedland were busy wrestling with an aggressive and at times belligerent trading partner south of the border. Abroad, Europe was having a déjà vu moment with Italy and the challenge of a populist government moving into power. Emerging markets were especially challenged as a surging US dollar affected their ability to fund their dollar denominated debt. Pockets of political instability in Turkey and Venezuela have exacerbated those issues. As for equity markets, the story remains the same, with the US being the sole standout and most other markets lagging for the quarter and flat to down for the year.

In Canada, a deal was finally reached to replace NAFTA although many pundits feel that the new deal (“greatest deal of all time”) looks a lot like the old deal (“worst deal of all time”), and the hardline of the Canadian negotiators appears to have paid off for the most part. Lessons can be learned from the outcome here, as we pointed out previously in our commentary - it is dangerous and futile to get caught up in the headlines of the day. Canadian equities have lagged global peers for the most part; however, with NAFTA resolved, rebounding energy prices, and strong employment conditions, there are certainly reasons to be optimistic.

In the US, the economic news continues to be positive as fiscal stimulus in the form of tax cuts has provided energy to the economy, just as monetary stimulus begins to unwind with rising interest rates. While growth in the short term is welcome, longer term the wisdom of cutting taxes funded by deficits ten years into a recovery is questionable and could be problematic. Indeed, the Federal Reserve should be concerned that the fire is being stoked in part by these tax cuts, and recent wage inflation will give them cover to begin raising rates more aggressively. Higher interest rates is likely the biggest risk now to the strongest equity markets we have seen in the US over the last several years.

Europe continues to face challenges on a few fronts with a looming “Brexit”, as well as issues in Italy. With respect to the UK, it is likely that a reasonable trade deal will be the outcome, although the thornier issues on the border in Ireland seem more elusive. Italian politics have provided drama recently as a coalition of populists with divergent ideologies attempt to revive a moribund economy. The one common trait of these parties is a lack of fiscal restraint, and this reality has hurt Italian bonds and Italian banks in particular. To date, this seems mostly constrained to Italy but bears watching given the relative size of their economy within the EU.

Finally, China was a constant target of increasing tariffs by the US, and as the North American trade dispute winds down, a much larger dispute with far ranging implications could be set to ramp up. Hundreds of billion dollar tariffs have already been levied and it appears that we are in the early innings of this. Any protracted trade war could have very negative consequences for both countries but China may be particularly at risk.

The upcoming US congressional elections will provide some drama into the end of the year; however, exiting the quarter, the biggest story may be the continued rise in interest rates. US equities have outperformed the rest of the world and we would not be surprised to see some of the froth come out of some of the riskier stocks given elevated valuations. Canadian and International stocks are looking relatively more attractive as valuations have not inflated to the same degree as some industries in the US. Rest assured we will continue to be patient and find the highest quality companies for your portfolio to ensure stable growth in the long run.