The first quarter of 2018 was marked by increased volatility and a number of factors, both positive and negative, that influenced investors’ perception of the markets going forward. During the first quarter there were 14 days when global stock markets moved by over 1% (i.e. up and down) compared to only three days in all of 2017. On the positive side for investors, we saw continued synchronized global economic growth, historically low interest rates, tax cuts in the US, and strong growth in corporate earnings. Offsetting these positive factors were concerns regarding higher inflation, possibly higher interest rates, global trade friction resulting from President Trump’s protectionist threats, geopolitical risks, and high stock valuations. Many investors were also concerned about the length of the current market cycle which has generally been all upward since 2009.
The Canadian stock market fell 4.5% in the first quarter of 2018 which was lower than most other developed markets, although globally, most stock markets experienced low returns during this period. The large Energy sector, including both pipeline companies and producers, was again the source of much of the decline (-9.4%); continuing transportation issues contributed to an increasing discount price for Canadian crude versus improving global oil prices. The small Information Technology sector was the only positive industry sector for the quarter (up 10.2%). The large Financial sector was also a drag on performance being down 3.5% for the quarter. The Canadian stock market is up 1.7% for the one-year period.
The US S&P 500 index rose 2.1% in the first quarter leading to a year-over-year gain of 10.2%. Global stock markets continued to have positive returns in the first quarter except for a few markets like Ireland and the UK, largely due to Brexit concerns. Information Technology continued to be the best performing sector, albeit returns (+2.6%) were more muted this quarter than they had been over the last year. Stock market valuations were generally still considered on the high side and potential concerns still centred around higher interest rates, global trade friction, and potentially peaking economic and corporate earnings growth. Emerging markets continued to outperform developed markets with several countries like Brazil, Peru and Egypt all experiencing double-digit gains in the first quarter.
The Canadian bond market generally sold off during the first quarter and returned only 0.1% and had a 1.8% for the one year. Investors were still concerned about the potential inflationary impact from both strong job data and tax reform in the U.S. Both the U.S. Federal Reserve and the Bank of Canada (BoC) increased interest rates by 0.25% in the first quarter. The BoC indicated a more cautious approach to further rate increases due to uncertainty around NAFTA talks, trade disputes and the high level of consumer debt. Both Corporate and Provincial bonds underperformed Federal bonds. Real Return bonds were the highest performer in the bond sector at 1.4% for the quarter reflecting some fear of a resurgence in inflation.