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Fourth Quarter Letter 2019

January-22-20

2019 Year End Letter

While we expected a strong year for equity markets in 2019 given the overblown sell-off toward the end of 2018, we were surprised by the magnitude of the rally. Profit growth of U.S. corporations has been anemic as tariffs imposed on imports from China and other countries have cost U.S. companies US$46 billion, while U.S. exports of goods hit by retaliatory tariffs have fallen sharply. So what drove the markets to record levels? Fears of an impending recession faded quickly early in the year, followed by a series of interest rate cuts in the U.S. and elsewhere, capped-off by hopes of a partial resolution to the U.S. trade war with China. Record share buy-backs also helped. The Bank of Canada resisted lowering rates and consequently the Loonie was the best performing G7 currency rising nearly 5% versus the U.S. dollar. Lower interest rates also drove bond markets higher than even the most bullish investor anticipated and inflated other asset classes such as real estate.