The global economy continued to improve in 2017 in both the developed and emerging markets. Economic activity and corporate earnings have both had positive results which led to very strong stock market returns in most countries. Low interest rates and accommodative monetary policy have all provided support for continued global economic expansion. In Canada, concerns still remain around NAFTA renegotiations, oil and natural gas prices, high consumer debt levels and the potential effects if the housing market was to materially soften. Inflation still remains quite low throughout most developed markets although unemployment levels have generally been falling.
The Canadian stock market gained 4.4% in the fourth quarter and finished the year up 9.1% with 10 of 11 industry sectors delivering positive results. The Health Care sector was the best performing sector in the fourth quarter (up 46%) however, this represents only a 1% weighting in the stock index. Canadian stocks had the lowest returns of any developed country and continued to lag many foreign equity returns in 2017. The large weightings in the Energy and Materials sectors (weak returns) and low weighting in the Info Technology sector (high returns) accounted for much of this difference in returns. The Canadian dollar strengthened by 7% compared to the U.S. dollar in 2017, which reduced our U.S. stock performance when translated back into Canadian dollars.
The U.S. S&P 500 index returned 7% in the fourth quarter (in Canadian dollars) and was up 13.5% (21.8% in local currency) in 2017. Most foreign stock markets had a very positive 2017 with the MSCI World Index increasing 15% over the past year in Canadian-dollar terms. Emerging Markets again had the strongest returns in 2017 at 28% for the one-year period. The strong emerging markets returns have largely been driven by countries including Brazil, China and South Korea. The European stock market also performed well in 2017 as economic growth generally continued to improve.
The Canadian bond market returned 2% in the fourth quarter of 2017 with a one-year return of 2.5%. The weakest bond sectors in 2017 were Real Return Bonds (0.7%) and Short-Term bonds (.08%) with Long-Term bonds (7%) faring the best. The Bank of Canada increased its main policy rate twice in 2017 to combat the risk of inflation. The U.S. Federal Reserve raised rates three times in 2017 (by 0.75% in total) and have forecast another three potential rate increases in 2018. They have also begun to reduce the $4.5 Trillion of debt on their Balance Sheet. The central banks of Japan and Europe are still involved with their quantitative easing programs to help stimulate their economies.