The equity markets had a strong third quarter as the surprise Brexit vote result and other market concerns had a less apparent impact in the quarter. Monetary stimulus in many regions was still a catalyst for supporting the equity markets. Some countries, like Japan, were also contemplating fiscal stimulus to help support their slow economic growth. Bond markets were also calmer in the third quarter until September when there were some expectations of a possible U.S. Federal Reserve rate hike, which ultimately did not happen.
The Canadian stock market had another positive quarter with a return of 5.5% leading to a return of 15.8% on a year-to-date basis. Outperformance over the index was more widespread with seven of 11 industry sectors beating the index. Some of the more “safe-haven” sectors, like Gold stocks (down 9%) and Utilities underperformed the broader market. The strongest sectors were IT, Industrials and Health Care. The index’s strong performance was helped by corporate earnings exceeding consensus expectations and a number of M&A announcements. The Canadian economy continues to be influenced by lower oil prices and the repercussions of the Alberta wildfires.
The U.S. S&P 500 index returned 4.9% in the third quarter (in Canadian dollars) and is up just 2.4% year to date. The appreciation of the Canadian dollar versus the U.S. dollar by over 5% in 2016 has dampened these returns to Canadian investors. Most foreign markets had a positive third quarter with the World Index increasing 5.9% in Canadian dollar terms (4.9% in local currency) which brought the year-to-date return into positive territory (+0.2%). Countries in the Pacific Region and many Emerging Markets performed well in the quarter whereas there were mixed results amongst the European countries. Europe is still suffering from slow economic growth despite high monetary stimulus due to Brexit, political uncertainties and areas of weakness in the key financial sector.
The Canadian bond market returned 1.2% in the third quarter of 2016 with a year-to-date return of 5.3%. The Bank of Canada left its main policy rate unchanged again at 0.5% in the third quarter and reiterated that they are still nervous about economic growth within the economy. The U.S. Federal Reserve also did not increase rates in the third quarter as they expressed concerns over the low level of global economic growth. Almost 30% of all global bonds now trade at negative real interest rates. The bond market has had a strong run for over 30 years due to declining interest rates. In more recent times the bond market has been largely affected by very accommodative central bank monetary policies. Many countries are now questioning how effective these loose monetary policies have been given continued slow economic growth despite very low or negative interest rates.