Market Commentary – First Quarter 2017

Most foreign stock markets had a very strong first quarter in 2017 and witnessed very low price volatility. Trump’s pro-growth policies and somewhat more positive economic data were factors that helped support the rise in these markets. There are still many lingering uncertainties among investors including; the implementation of Trump’s policies, Brexit negotiations, European elections, high valuations in many stock markets and the extended period since the U.S. last experienced a recession. In Canada, high levels of consumer debt, a potential deceleration in the housing market and U.S. protectionist policies are all concerns.

The Canadian stock market posted a gain of 2.4% in the first quarter which, in contrast to 2016, lagged most other foreign stock markets. The main reason for this lag was largely due to the influence of Canada’s large energy sector. Oil dropped in price in the first quarter despite OPEC’s attempt to manage the supply side to support stronger prices. Most other industry sectors performed quite well in the first quarter including Basic Materials (gold prices rose), Utilities and Technology stocks. The one-year index return of 18.6% was very strong reflecting rising commodity prices over that time frame.

The U.S. S&P 500 index returned 5.5% in the first quarter (in Canadian dollars) and is up 20.8% for the year. President Trump has continued to push his pro-business agenda in the U.S. but many investors are watching to see if these policies are ultimately approved by Congress.  Both the Technology and Health Care sectors performed strongly in the first quarter. Most foreign stock markets had a positive first quarter with the MSCI World Index increasing 6.1% in Canadian-dollar terms despite continued limited expectations of economic growth. Optimism around an improving U.S. economy and continued accommodative monetary policy in many countries supported investors’ views of improving markets despite rising geopolitical tensions, low economic growth rates and high levels of debt in many developed countries.

The Canadian bond market returned 1.2% in the first quarter of 2017 with a one-year return of just 1.5%.  The strongest bond sectors were Corporates and Long dated bonds in the first quarter with Real Return bonds being the weakest bond sector. The Bank of Canada left its main policy rate unchanged at 0.5% in the first quarter and maintained their view that they are still nervous about economic growth within the Canadian economy. However, in Canada’s fourth quarter of 2016, the annualized GDP growth rate of 2.6% surprised to the upside and the unemployment rate continued to fall. The U.S. Federal Reserve increased rates again in the first quarter by another 0.25% and indicated a strong likelihood of more rate increases in 2017. Several central banks have indicated that in 2017 they may start easing up on the extraordinarily high level of monetary stimulus they have been providing.