When Down Means Up

There’s a distinct pattern in this bull market cycle—bad economic news has actually been good news for markets. Learn why.

07.23.2019 - Ian Riach, Chief Investment Officer

Despite the dip in May, global equity markets finished the second quarter strong. North American indexes teased all-time highs and, in fact, breached these levels in early July trading. International equities also ended the quarter higher, with developed markets outperforming emerging markets.

May market weakness was prompted by softer economic data and the announcement that President Trump was moving ahead with tariffs on imports from China. In Canada, this news was compounded by China imposing new restrictions on certain agricultural products. This move overshadowed some positive data on business investment and consumer confidence.

Once again, central banks came to the rescue and markets reversed their downward trend. In early June, the US Federal Reserve (the Fed) reiterated its dovish stance and markets began pricing in at least two rate cuts by the end of 2019—this stands in sharp contrast to last fall when rate increases were anticipated. Not to be left out, President of the European Central Bank, Mario Draghi stated that “an ample degree of monetary accommodation is still necessary”…as risks to European economic growth are tilted to the downside1. The Bank of Canada (BoC) preferred to be more stoic in its outlook stating, “the degree of accommodation being provided by the current policy interest rate remains appropriate2.” At its present level, we consider the BoC policy rate to be accommodative. In any case, monetary authorities look prepared to provide stimulus by keeping rates low, which, in turn, tends to bolster financial asset prices.

Equities were not the only financial assets to rally in the second quarter. Bonds also performed well. The 10-year US Treasury yield touched 2.0% at the quarter’s end, down from over 2.7% in January. Canada’s 10-year yield followed suit, dropping to around 1.4% from over 2.0% in January. Bonds beyond North America provided positive returns as well.

Like so many other times in this extended market cycle, bad economic news was actually good news for markets, as investors anticipated lower interest rates. We acknowledge that easier central bank policy may continue to fuel higher equity valuations in the short run and that it is dangerous to “fight the Fed.” However, we question the sustainability of a central bank induced rally as economic and financial fundamentals deteriorate. Thus, we remain somewhat cautious in our views heading into the second half of the year.






1. “Press Conference (with Q&A),” Economic Central Bank, June 6, 2019,

2. Bank of Canada maintains overnight rate target at 1 ¾ per cent,” Press Release, Bank of Canada, May 29, 2019,


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