Market Commentary – Third Quarter 2017

In 2017, the global economy continues to perform reasonably well so far in both developed and emerging markets. Economic activity and corporate earnings have both had improved results which has helped move stock markets higher. Central banks have been responding to the improved economic performance with the Bank of Canada raising interest rates twice in the third quarter of 2017. In Canada, concerns still remain around NAFTA renegotiations, fragile oil prices and potential effects if the housing market was to materially soften. It was generally a good quarter for commodity prices which provide a tailwind for the Canadian stock market. Inflation still remains quite low throughout most developed markets.

The Canadian stock market gained 3.7% in the third quarter of 2017 mainly due to higher oil prices and strength in Financial stocks. The Energy sector was the best performing sector in the third quarter (up 6.6%) after significantly underperforming in the first half of the year. Canadian stocks have still lagged many foreign equity returns so far in 2017 after a very strong year of performance in 2016. The one-year index return is 9.2%. The Canadian dollar has been strengthening versus the U.S. dollar in 2017 and is up about 7.0% on a year-to-date basis.

The U.S. S&P 500 index returned 0.6% in the third quarter (in Canadian dollars) and is up 13.1% over the last year to an all-time high level. Most foreign stock markets had a positive third quarter with the MSCI World Index increasing 1.0% (up 12.7% over one year) in Canadian-dollar terms. Emerging Markets again had the strongest returns in the third quarter at 4.0% and are up 17% for the one-year period. The strong returns for emerging markets have largely been driven by index heavyweights including Brazil, China and Russia. The European stock market also continues to do well in 2017.

The Canadian bond market returned -1.8% in the third quarter of 2017 with a weak one-year return of -3.0% as increasing interest rates reduced bond prices.  The weakest bond sectors were Real Return bonds (-3.0%) and Long Term bonds (-4.1%) in the third quarter with Short Term bonds (-0.4%) faring the best. The Bank of Canada increased its main policy rate both in early July and surprisingly again in September (to 1.0%) due to unexpectedly strong economic growth. The U.S. Federal Reserve also indicated a strong likelihood of at least one more rate increase in 2017. They have also indicated a desire to begin reducing the $4.5 trillion of debt on their Balance Sheet later this year. The central banks of Japan and Europe are still fully involved with their quantitative easing programs to help stimulate their economies.