Market Commentary – Third Quarter

Assisted by accommodative interest rate policies, most developed stock markets continued higher in the third quarter of 2019. This was despite ongoing problems including political uncertainties, U.S.-China trade tensions, issues in the Middle East, and concerns around slowing global economic growth. Central banks continued to ease interest rates to help boost their economies, although most global economic data continued to be mixed at best. For example, U.S. manufacturing activity fell to its lowest level since 2016. The concern with this is that weak manufacturing could lead to job losses and further impede overall growth. However, labour markets remain strong, particularly in the U.S. which supports ongoing personal consumption that is a big driver of the U.S. economy.

The Canadian stock market had another positive quarter returning 2.5% with a year-to-date return of a very strong 19.1%. Canada continues to be one of the best performing stock markets in 2019 being helped partially by rising commodity prices. Performance was mixed across industry sectors with negative returns in Health Care (-30%, mostly from weak cannabis stocks) and Industrials (-1.5%) in the third quarter. The strongest industry sectors in the quarter included Utilities (10.1%), Consumer Staples (5.8%) and Financials (5.2%).

Foreign developed country stock markets were mostly positive in the third quarter except for a number of the larger European countries, like Germany, that are highly dependent on exports. The U.S. S&P 500 index was up 2.8% (in Canadian dollars) in the third quarter and is up 17.2% on a year-to-date basis. Sector returns in Utilities (10.6%), Consumer Staples (7.3%) and Information Technology (4.5%) all did well in the third quarter. The MSCI All Country World Index (ACWI) was up 1.2% in the third quarter and is up 13.4% year-to-date in 2019. Emerging markets continued to underperform developed markets with the MSCI Emerging Markets Index (EM) down 3.1% in the quarter and up only 3.1% so far in 2019.

Bond yields continued to fall globally in the third quarter as central banks continued to provide monetary stimulus to support their economies. Globally negative yielding bonds have tripled in magnitude this year and now make up almost one quarter of the Global Bond index, or over $13 trillion (in U.S. dollars). The Canadian bond market continued to perform well and returned 1.2% in the third quarter of 2019, with a strong year-to-date return of 8.1%. This positive return is mainly a result of the declining yield trend (i.e. bond prices rising) in 2019. Long-term bonds had the strongest sector returns being up 2.3% in the third quarter and 15.4% year-to-date. The Bank of Canada left interest rates unchanged again in the third quarter whereas the U.S. Federal Reserve cut rates twice in the quarter. At the end of September, the Canadian 10-year bond was yielding only 1.36%, down from 1.96% at the start of 2019.