Global markets delivered mixed returns in the third quarter of 2018 with the U.S. market supported by strong economic growth outperforming other major markets. Canadian stock and bond markets and emerging market stocks all had negative returns for the quarter. Concerns still remain regarding synchronized central bank policy tightening, rising protectionism, trade disputes, high global debt levels and reducing fiscal stimulus in most countries in 2019. Concerns also exist around how increasing interest rates may affect global economies and markets.
The Canadian stock market lost 0.6% in the third quarter of 2018 which was a marked reversal from the 6.8% gain in the second quarter. On a year-to-date basis the index is up only 1.4%. Energy, Pipelines, Gold stocks and Consumer Discretionary sectors were all weak with the small Health Care sector being one of the few bright spots largely driven by the rise in cannabis stocks. Although oil prices increased, most Canadian energy stocks underperformed as the lack of pipeline capacity led to very wide price discounts for Canadian oil. The high level of uncertainty in the market around the NAFTA negotiations was addressed with a new agreement (USMCA) reached at the very end of the third quarter, which still needs to be approved.
The U.S. S&P 500 index returned 5.9% in the third quarter (in Canadian dollars) and is up 21.8% in the past twelve months. Sector returns in Health Care, Info Technology and Industrials were all strong in the third quarter. Concerns still remain around ongoing trade disputes, raising inflation and interest rates and increasing geopolitical turmoil. Most non-North American stock markets have not performed as strongly with the MSCI All Country Index up 2.6% in the third quarter and up 13.4% over the past year. Emerging Markets (-3.2%), UK (-3.3%) and Germany (-2.2%) all experienced negative returns in the third quarter as economic growth has decelerated in many countries outside of the U.S. trade tensions, Brexit talks and higher energy prices have all negatively affected many of these markets.
The Canadian bond market returned -1.0% in the third quarter of 2018 with a one-year return of just 1.7%. All of the bond sectors were flat or negative in this quarter with Real Return Bonds (-2.2%) and Long-Term bonds (-2.4%) having with weakest performance. The Bank of Canada increased its main policy rate again by 0.25% to 1.5% in July which precipitated the drop in bond prices. The Bank of Canada indicated that further rate increases can be expected throughout 2018 and 2019 if the economy continues to perform well as they gradually remove monetary stimulus. The U.S. Federal Reserve also raised rates by 0.25% in September to 2.25%, their fourth increase the past year, in response to their strong economic growth and fears of rising inflation.