Market Commentary – Fourth Quarter 2016

The equity markets had another strong quarter in the fourth quarter of 2016, reflecting more positive reports on potential improvements in many developed countries worldwide. The surprise election of Donald Trump also helped equity markets as many felt that his pro-business stance would be beneficial for the markets. The U.S. Federal Reserve increased interest rates in the fourth quarter for the first time in a year. This hurt bond prices quite significantly in the quarter as bond yields also rose on the expectation of further interest rate increases in 2017.

The Canadian stock market posted a strong gain of 4.5% in the fourth quarter and 21.1% for the one-year period which was one of the highest returns for any developed country. The Energy (35%), Materials (41%) and Financials (24%) sectors, which make up a significant part of the Canadian market, all had a very strong year. The price of oil improved dramatically in 2016 which pushed oil and gas stocks much higher. As well, a number of different metal prices (e.g. copper, iron ore) strengthened quite significantly throughout the year. Banks continued to do well and the increase in interest rates was seen as a positive factor for their earnings outlook.

The U.S. S&P 500 Index returned 5.9% in the fourth quarter (in Canadian dollars) and is up 8.1% for the year. Both the Trump election and more bullish economic growth forecasts all helped the U.S. stock market. Most foreign markets had a positive fourth quarter with the MSCI World Index increasing 3.9% in Canadian-dollar terms which brought the one-year return into positive territory at 3.8%. Countries in the Pacific Region, including Japan, performed well in the quarter whereas there were mixed results among 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 -3.4% in the fourth quarter of 2016 with a one-year return of only 1.7%. The Bank of Canada left its main policy rate unchanged at 0.5% in the fourth quarter and reiterated that they are still nervous about economic growth within the economy. The U.S. Federal Reserve increased rates in the fourth quarter by 0.25% and indicated possibly several more increases in 2017. Trump’s election has led many investors to believe this would accelerate economic growth from increased fiscal spending and deregulation which could accelerate inflation in the U.S. The European Central Bank announced an extension to its quantitative easing (QE) program which will likely keep their interest rates low for some time. The Government of Canada 10-year bond yield increased by 0.78% in the fourth quarter as Canadian bond prices fell largely due to the U.S. Federal Reserve increase in rates.