Market Commentary – Second Quarter 2017

So far, the global economy has generally been improving in 2017 with this growth broadening across more countries. A number of countries are now considering moving away from their historically low interest rates, which were put in place to encourage more economic growth. The Canadian economy continued to be fairly strong in the second quarter of 2017 with good growth of jobs and the GDP, as well as a generally improving business sentiment. However, concerns remain around NAFTA renegotiations, fragile oil prices and potential effects if the housing market was to materially soften. Inflation remains quite low throughout most developed markets.

The Canadian stock market fell by 1.6% in the second quarter of 2017 mainly due to lower commodity prices and declines in the large Energy (-8.3%), Materials (-6.4%) and Financials (-0.9%) sectors. After a very strong year of performance in 2016, Canadian stocks have lagged many foreign equity returns so far in 2017. The one-year index return of 11% was very positive, largely reflecting rising commodity prices over that period. The Canadian dollar has been strengthening versus the U.S. dollar in 2017, reflecting a Canadian economy growing faster than many expected. Canadian GDP growth has been one of the strongest of the G7 nations.

The U.S. S&P 500 index returned 0.4% (in Canadian dollars) in the second quarter and is up a strong 17.9% for the one-year period. Most foreign stock markets had a positive second quarter with the MSCI World Index increasing 1.7% in Canadian-dollar terms. Emerging Markets had the strongest returns in the second quarter at 3.6% and are up 23.7% for the one-year period. China’s economy has been showing signs of improvement throughout 2017 so far. The European stock market has also done well with the Europe ex-UK index up 24.4% over the last year.

The Canadian bond market returned 1.1% in the second quarter of 2017 with a one-year return of just 0.02%. The strongest bond sectors were Provincials and Long dated bonds in the second quarter with Short Term bonds being the weakest bond sector. In early July, the Bank of Canada finally increased its main policy rate for the first time in seven years by 0.25% to a rate of 0.75%. The U.S. Federal Reserve also increased rates again in the second quarter by another 0.25% and indicated a strong likelihood of one or more rate increases in 2017. They have also indicated they will likely begin reducing the $4.5 trillion of debt on their Balance Sheet later this year. Several foreign central banks have indicated that in 2017, they may start easing up on the extraordinarily high level of monetary stimulus they have been providing.