Market Commentary – Second Quarter 2019

Markets were generally higher in the second quarter and the U.S. S&P 500 index closed the first half of 2019 at an all-time high. Stock markets produced the strongest first half-year gains in over twenty years since 1997. However, the bond market seemed to be sending conflicting signals as U.S. interest rates have dropped back to near record lows as fears of a possible coming recession and slowing economic growth have led some to believe that more policy stimulus is needed. Many macroeconomic concerns still persist with trade disputes between the U.S. and China dominating the minds of many investors. Other concerns include Brexit negotiations, slowing economic growth indicators (especially in Europe), and emerging markets and geopolitical concerns in areas like Iran and North Korea.

The Canadian stock market had another positive quarter returning 2.6% with a year-to-date return of a very strong 16.2%. Canada has been one of the best performing stock markets in 2019 after being one of the weakest in 2018. Most of the industry sectors experienced positive gains except Energy (-2.8%) and Health Care (-9.3%, mostly from weak cannabis stocks) in the second quarter. The strongest industry sectors in the quarter included Information Technology (14.3%), Utilities (5.4%) and Materials (5.4%).

Foreign developed country stock markets were all positive in the second quarter as investors’ appetite for riskier assets (i.e. stocks) rebounded from late 2018 despite trade tensions between the U.S. and a number of their major partners and weaker economic growth indicators all weighing on the sentiment of investors. The U.S. S&P 500 index was up 2.2% (in Canadian dollars) in the second quarter of 2019 and up 13.9% for the first half of 2019. Sector returns in Financials (5.8%) and Information Technology (3.9%) all did well in the second quarter. The MSCI All Country World Index (ACWI) was up 1.7% in the second quarter and up 12% year-to-date in 2019. Emerging markets continued to underperform developed markets with the MSCI Emerging Markets Index (EM) down 1.4% in the second quarter and up 6.4% so far in 2019.

During the second quarter, bond yields fell globally as central banks adjusted their outlook and many investors changed their views on the timing and direction of further interest rate changes. Globally negative yielding bonds make up almost one quarter of the Global Bond index, or almost $13 trillion (in U.S. dollars) of such bonds. These investors are paying the borrowers (i.e. primarily banks) to keep their funds for them. The Canadian bond market performed well and returned 2.5% in the second quarter of 2019, with a strong one-year return of 7.4%. This positive return reflected the drop in bond yields as many central banks, including the U.S. Federal Reserve, changed from a “neutral” stance on interest rate changes to one of being more willing to make further cuts. Long-term bonds had the strongest sector returns being up 4.8% in the second quarter and 12.1% year-to-date. At the end of June 2019, the Canadian 10-year bond was yielding only 1.46%.