Market Update Q3 2017

 

This past quarter exemplifies what you as an investor should consider regarding your portfolio. We’ve seen tensions increase in the North Korean peninsula and the Middle East and ongoing drama from the United States. You’d be forgiven if you thought the increased drama had negatively affected global equity markets. Equity markets can move up or down each day for many reasons but over the long term, market valuations tend to return to their fundamentals—and the fundamentals during the past three quarters have justified markets moving higher.

 

Canada


Oil prices advanced throughout the quarter by nearly twelve per cent to US$51.7 per barrel. A strong economy and a rebound in commodity prices helped S&P/TSX Composite earnings grow at nearly 32 per cent. Nine of ten sectors saw positive earnings growth in the third quarter, which helped the S&P/TSX Composite Index gain 2.9 per cent.

 

The U.S. is expected to produce 10 million barrels of oil a day by next year, which will offset recent increases in global oil demand. As a result, oil will likely average in the high US$40 range for the rest of the year.

 

The United States


U.S. corporations are reporting better year-over-year sales and earnings results. Employment continues to improve with a falling unemployment rate, recently at 4.4 per cent as of the end of August. This implies wage growth in the second half of 2017. Higher wage growth coupled with low gasoline prices means U.S. consumption is in a strong fundamental position.

 

Since U.S. consumption accounts for three quarters of U.S. economic output, the U.S. economy is on the right track. As a result, prospects for equities should be good for the rest of the year. The benchmark S&P 500 Index gained 4.0 per cent in the second quarter, in U.S. dollar terms, or slightly negative at -0.1 per cent in Canadian dollar terms, reflecting improved company results.

 

Overseas


In overseas markets, international equities rose 0.7 per cent in Canadian dollar terms as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved. Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

 

Central Bank Policy


In the second quarter, the U.S. Federal Reserve did not tighten interest rates after raising them twice by increments of 0.25 per cent to 1.25 percent in 2017. However, they announced they will begin to reduce the $4.5 trillion balance sheet starting in October. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another time by the end of the year.

The Bank of Canada began tightening its interest rate policy to 1.0 per cent by announcing two rate increases of 25 basis points each in July and September. As a result, the Canadian dollar rallied nearly four per cent versus the U.S. dollar. It’s expected rates will increase very gradually going forward. The recent increases were significant changes considering Canada hasn’t seen a rate increase since September 2010.

 

Looking forward


We continue to believe the U.S., Canadian, and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns. While we may be confident equity markets will deliver another year of positive returns, market volatility is likely to remain through the rest of 2017, driven mainly by headline news and politics.

 

As always, if you have any questions about the markets or your investments, I'm here to talk.

 

Photo from I'd Pin That

Market Update - Q2 2017

2017 Q2 Market Update

Challenges in the quarter

This past quarter exemplifies what investors should consider regarding their portfolios. We’ve seen tensions increase in the North Korean peninsula and the Middle East, and continued drama from the United States. You would be forgiven if you believed the increase in drama had negatively impacted global equity markets.

 

Equity markets can move up or down for any and all reasons on a daily basis. However, over the long term, market valuations tend to return to their fundamentals—and the fundamentals over the past two quarters have justified markets moving higher.

Canada

Starting in Canada, oil prices declined throughout the quarter by nearly nine per cent to US$46 per barrel. Concerns about the business operations of Canada’s largest subprime lender, Home Capital Group, and its impact on Canadian banks, helped the S&P/TSX Composite Index fall 2.4 per cent through the quarter.

 

Oil is likely to average in the high US$40 range for the rest of the year as the U.S. is expected to produce 10 million barrels of oil a day by next year. This will replace 80 per cent of OPEC’s production cuts discussed in November 2016.  

The United States

U.S. corporations are reporting better year-over-year sales and earnings results. Employment continues to improve with a falling unemployment rate, recently at 4.3 per cent, which implies wage growth in the second half of 2017. Higher wage growth coupled with the lowest gasoline prices we’ve seen in 2017 means U.S. consumption is in a strong fundamental position.

 

Since U.S. consumption accounts for three quarters of U.S. economic output, the U.S. economy is on the right track. As a result, prospects for equities should be good for the rest of the year. The benchmark S&P 500 Index gained 2.6 per cent in the second quarter in U.S. dollar terms or 0.2% per cent in Canadian dollar terms, reflecting improved company results.

Overseas

In overseas markets, international equities rose 2.6 per cent in Canadian dollar terms as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved. Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

Central Bank Policy

The U.S. Federal Reserve continued to tighten its interest rate policy, raising its benchmark interest rate to 1.25 per cent in June. This marks the second rate increase this year and the fourth in two years since the Great Recession, which confirms the strength in the U.S. economy. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another one or two times this year.

 

It appears the Bank of Canada is preparing to hike its benchmark interest rate supported by a strengthening Canadian economy. While it’s expected rates will increase very gradually, it’s a significant change since Canada has not seen a rate increase since September 2010.  

Looking forward

We continue to believe the U.S., Canadian and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns.

 

While we may be confident equity markets will deliver another year of positive returns, market volatility is likely to remain through much of 2017, driven mainly by headline news and politics. We continue to advise a balanced approach to asset allocation matched to your individual goals.

 

As always, if you have any questions about the markets or your investments, I'm here to talk.

 

(Photo from IdPinThat)

Market Update - Q1 2017

2017 Q1 Market Update - Pixabay.com

 

Considering the year began with such uncertainty, equity and fixed income markets performed exceptionally well in the first quarter. Investors overestimated the magnitude of market volatility that would ensue from an Obama to Trump transition of power and markets shrugged off the political drama and took equities higher.

 

Challenges in the quarter


This past quarter exemplifies what investors should consider with regard to their portfolios. There are many sentimental reasons to fear the stock market, including recent examples like Brexit, Grexit, the Fiscal Cliff, the Debt Ceiling, the election, and the budget. Markets can be swayed over the short term by daily headlines.

 

Equity markets can move up or down for any and all reasons on a daily basis. However, over the long term, market valuations tend to return to their fundamentals—and the fundamentals over the past two quarters have justified markets moving higher.

 

Oil prices


Starting in Canada, oil prices seem to have stabilized through the first quarter to nearly US$50 per barrel, bringing less volatility for Canadian stocks. The S&P/TSX Composite Index gained 2.4 per cent factoring in dividends through the quarter. Oil prices are expected to remain near their current level, which has multiple implications.

 

First, stable oil prices are positive for the Canadian energy sector and Canadian stocks overall. Secondly, as oil prices remain a strong influence on the Canadian dollar, stable prices should translate into a stable dollar with an average exchange rate near its current US$0.75.

 

The United States


South of the border, the newly appointed Trump administration added a new element to conversation–and not just for talk shows! Putting politics aside, companies are reporting better year-over-year results on sales and earnings. Unemployment continues to fall.

 

Economic growth continues to improve. In short, the U.S. economy is on the right track. And with it, come prospects for equities through the remainder of the year. The benchmark S&P 500 Index gained 6.1 per cent in the first quarter including dividends, in U.S. dollar terms, or 5.3 per cent, in Canadian dollar terms, reflecting improvements in company results.

 

Overseas


Overseas markets showed healthy gains with international equities up 6.6 per cent in Canadian dollars as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved, akin to that of the United States. On the other side of the world, Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

 

Central Bank Policy


This quarter marked the third time in two years, and since the Great Recession, that the U.S. Federal Reserve raised its benchmark interest rate. The Bank of Canada didn’t and hasn’t followed suit as the Canadian economy hasn’t performed as strongly as the U.S. economy.

 

The U.S. Federal Reserve is expected to continue to raise its benchmark rate another two or three times this year. The environment is meeting the conditions of low unemployment and stable inflation, allowing the Fed to act.

 

Looking forward


We continue to believe the U.S., Canadian and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns.

 

While we may be confident that equity markets will deliver another year of positive returns, market volatility is likely to remain through much of 2017—driven mainly by headline news and politics. We continue to advise a balanced approach to asset allocation matched to your individual goals.

 

As always, if you have any questions about the markets or your investments, I'm here to talk.

(Photo from IdPinThat)