Markets remain calm amid stormy August conditions

Markets remain calm amid stormy August conditions

August is typically a period of light trading activity, which lends itself to volatility as fewer market traders can cause bigger market moves. Yet this summer most equity markets managed modest gains without dramatic swings. Globally, corporate earnings were strong and evidence points to synchronized global economic growth.

Once again, a month-end snapshot of capital results hides the stormy waters of politics, international relations and Mother Nature’s fury. The violent events in Charlottesville, Virginia highlighted political disorder in the Trump administration, while a terrorist attack in Spain and an escalation of threats between the U.S. and North Korea heightened investors’ concerns. Hurricane Harvey ripped through Texas, followed in quick succession by Hurricane Irma’s direct hit on the Caribbean and eastern U.S. seaboard. These situations remain fluid and troubling from a human perspective, while the full economic effects remain unknown.

Equities see little change

Over the course of the summer, equity markets changed little. Gold prices benefited from the safety trade as geopolitical tensions rose, helping the Canadian materials sector post the month’s strongest sector return. In contrast, the energy sector continued to be weak in both Canada and the U.S. – oil prices dropped while other commodities (e.g. copper, natural gas, silver, gold) rallied on strong economic growth trends, increased demand from China, a weak U.S. dollar, and the flight to safety. Oil prices have come under pressure as increased U.S. production contributed to the already abundant supply of crude in storage. The price for crude oil and refined oil products (i.e. gasoline) were volatile in August due to Hurricane Harvey’s direct hit on Houston, the center of the U.S. oil and gas industry.

Both the S&P 500 and S&P/TSX Composite delivered strong Q2 corporate earnings and sales results, helping to support stock values and keep both indices in positive territory in August.

The bond markets did not reflect the strength in equities. A modest flight to safety, weak inflation and geopolitical concerns added to the attraction of bonds in August. Yields fell, boosting bond market returns in both the U.S. and Canada. The Bank of Canada surprised investors by raising rates early in September, becoming the most hawkish of the big global central banks.

Meanwhile, the path to normalized rates and monetary policy in the U.S. and Europe remains a topic of great debate in terms of both timing and pace.

Data paints solid economic picture

Economic data reinforced a picture of accelerating global growth. Second quarter U.S. real GDP was revised upward, while Canadian real GDP for Q2 blew past expectations, rising 4.5% versus the consensus expectations of 3.7%. The past four quarters mark the strongest expansion since 2006. Consumer confidence also rose to record levels. Consumer confidence rose to 122.9 in the U.S., the second highest reading since late 2000, and 121.7 in Canada, the highest level in nearly a decade.

Rounding out the pleasant surprises, U.S. ISM Manufacturing PMI jumped a healthy 2.5 points to 58.8, the highest level in six years.

European and Asian markets also reported a stream of positive economic data and tentative signs of a return to a healthier inflation.

Markets turn deaf ear to politics

Capital markets have recently turned a deaf ear to the political situation in Washington. Banter between politicians no longer appears to signal meaningful progress toward policy change. Instead, markets have responded to economic data and corporate results – a development we approve.

In short, it’s a stock-picker’s market. This highlights a disadvantage of passive investing and exchange-traded investment options: an indifference to stock selection. If you buy into an index you forego the opportunity to differentiate “good” companies from better ones, nevermind separating “bad” companies from the worst. The goal of active portfolio management is to discover companies with the most attractive attributes – those poised to deliver strong capital appreciation within current market conditions.

Proven, defined investment processes combined with the experience and expertise of portfolio management teams offer risk management that can navigate today’s market conditions and deliver strong, long-term results.

Table 1: Summary of major market developments

Market returns*
August
YTD
S&P/TSX Composite 0.4%
-0.5%
S&P 500 0.1%
10.4%
- in Canadian dollars 0.4% 2.8%
MSCI EAFE 0.6% 6.4%
- in Canadian dollars -0.3 6.0%
MSCI Emerging Markets 1.9% 20.9%
FTSE TMX Canada Universe Bond Index** 1.4% 1.8%
FTSE TMX Canada all corporate bond index** 1.1% 2.6%

*Local currency (unless specified); price only
**Total return, Canadian bonds

Table 2: Currency and commodities
(in USD, % change)

  Level
August
YTD
CDN$ $0.801 0.0% 7.7%
Oil (West Texas)* $47.23 -5.9% -12.1%
Gold* $1,316 3.7% 13.7%
Reuters/Jefferies CRB Index* $180.86 -1.0% -6.1%

Table 3: Sector level results for the Canadian market

S&P/TSX Composite sector returns*
August
YTD
S&P/TSX Composite 0.4%
-0.5%
Energy -3.5% -16.0%
Materials 5.5% 5.8%
Industrials 3.0% 9.6%
Consumer discretionary 1.6% 9.6%
Consumer staples 0.4% 0.8%
Health care -10.3% -13.8%
Financials 0.1% 0.7%
Information technology 1.5% 9.4%
Telecommunication services 1.0% 8.0%
Utilities 1.5% 7.0%
Real estate 1.2% 2.1%

*Price only Source: Bloomberg, MSCI Barra, NB Financial, FTSE TMX Global Debt Capital Markets Inc.

Copyright 2017 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.