The second quarter of 2018 was very positive, although somewhat more volatile, for stock markets in Canada and the U.S. Strong economic performance, rising commodity prices, especially oil, low interest rates, tax cuts in the U.S. and strong growth in corporate earnings were all positives for the markets. In Canada, however, concerns still remain around NAFTA renegotiations, high consumer debt levels and their potential effects on the housing markets, and trade tariff threats harming exports and business confidence.
The Canadian stock market gained 6.8% in the second quarter of 2018 which was the highest return of any developed or emerging market. The cyclical industry sectors, including Info Technology, Energy, Materials and Industrials all did well. The large Financials sector underperformed (up 2.1%) as well as the Telecom and Utilities sectors. The Canadian market is now up 1.9% for the year to date and 10.4% over the last one-year period.
The U.S. S&P 500 index returned 5.4% in the second quarter (in Canadian dollars) and is up 15.8% in the past twelve months. Sector returns in Energy, Info Technology and Consumer Discretionary were all strong in the second quarter. There still remains concerns around ongoing trade disputes, raising inflation and interest rates and increasing geopolitical turmoil. Most non-North American stock markets did not perform as strongly with the MSCI All World Index up 2.7% in the second quarter. Emerging Markets (-6.1%), Japan and Europe ex-UK all experienced negative returns in the second quarter as growth momentum has decelerated outside the U.S. and both trade tensions and higher energy prices have negatively affected many of these markets.
The Canadian bond market returned 0.5% in the second quarter of 2018 with a one-year return of just 0.8%. The strongest bond sectors in this quarter were Real Return Bonds (2.0%) and Long-Term bonds (.09%) The Bank of Canada increased its main policy rate by 0.25% to 1.5% in early July, 2018 which is now the highest rate in almost 10 years. The relatively strong results of the Canadian economy lessened the case that low interest rates are required to stimulate further growth. The U.S. Federal Reserve also raised rates by 0.25% in June, their second increase this year, in response to their strong economic growth and fears of rising inflation.