The “big news” for stock markets in the third quarter was… news didn’t seem to matter. Consider the significant events that occurred during the quarter that had little discernible effect on markets’ steady upward march.
Attacks on civilians in in Europe and North America, heightened geopolitical tensions, military posturing, and verbal confrontations between the leaders of North Korea and the U.S. barely caused the stock markets to shudder.
At the same time, markets hardly paused while a massive earthquake rattled Mexico and a trio of hurricanes devastated the Caribbean and southern U.S.
An announcement from the U.S. Federal Reserve that it will start shrinking its swollen balance sheet, heated rhetoric from Washington, and NAFTA renegotiations all failed to get markets excited.
So the low volatility of 2017 continued to reign. This year, only 4% of trading days on the S&P 500 have seen moves greater than 1% in either direction, and we’ve yet to see a single day with a move of greater than 2%. Such low volatility is well outside historic norms. Over the past decade, a typical year sees roughly a quarter of its days with moves larger than 1%, and 7% of its days with moves greater than 2%.
In September, the intra-day trading range for the S&P 500 narrowed even further, as day-to-day highs and lows averaged only 0.4%, according to data compiled by Bloomberg. We don’t expect the markets to be this tone deaf to global and geopolitical events forever.
Markets respond to corporate earnings
What did stock markets care about this quarter? Earnings. Specifically, strong Q2 results and a bright outlook for global synchronized growth. North American equities were broadly supported by better-than-expected corporate earnings growth. The result was a slow and steady climb. In the U.S., it was the continuation of a steady march forward (in Q3, the S&P 500 hit its 39th new closing high of 2017). In Canada, the quarter started slowly, as the S&P/TSX Composite waited until September before rebounding from a lackluster spring and summer.
TSX rebounds in September
After muddling along for much of 2017, the S&P/TSX Composite rallied to post its strongest monthly gain since July 2016, rising 3% percent in September. The large Canadian energy sector was the top performer. Oil prices rose sharply in September on the back of improving fundamentals (tightening supply and strong global demand) and a weaker U.S. dollar. Synchronized global growth should act as a tailwind for Canadian equities and cyclical resource stocks in particular.
The Canadian financial sector also enjoyed a strong month of September. Recognizing Canada’s strong economic momentum, the Bank of Canada (BoC) hiked interest rates twice in the quarter. In July, the BoC raised rates for the first time in nearly seven years, hiking by 0.25%. More surprising was the move to raise rates another 0.25% in September, effectively removing the stimulus that was added during the oil price slump.
The higher rates boosted Canadian bank and insurance stocks. Conversely, the spike in yields caused a downturn in the Canadian bond market. Rising yields also led to strong Canadian dollar appreciation (up over 7% vs the U.S. dollar on the quarter).
Within fixed income markets , the Canadian corporate bond index performed best. The shorter duration of the corporate bond index (relative to the broader Canadian bond index) meant it was less sensitive to rising rates.
Globally, central banks continue to lean more hawkish (toward raising rates and/or reducing economic stimulus), putting upward pressure on global interest rates.
There is a chance the BoC will raise rates again before the end of the year. Canada’s economic data has been better than expected and oil prices are holding in at levels above US$50. However, BoC Governor Stephen Poloz and other representatives have stated they are carefully monitoring the impact of the rapid rate hikes to see how the economy digests a stronger loonie and higher yields. Additionally, geopolitical risks related to North Korea and other countries could halt the rise in rates faster than expected.
In other central bank news, the U.S. Federal Reserve announced its plan for balance sheet reductions starting in October. Fed chair Janet Yellen voiced her concerns about tightening “too gradually,” which put the possibility of a December hike back on the table. Meanwhile, Mario Draghi, president of the European Central Bank (ECB), revised the ECB-forecasted inflation expectation lower and made no changes to the policy rate at this point.
Blame it on the weather
Regular readers know we often highlight the benefits of a long-term focus when it comes to capital markets and the economy. We believe this will serve investors particularly well as economic data rolls in over the coming months. Specifically, we anticipate that economic data (particularly from the U.S.) will be skewed to the downside due to the particularly damaging hurricanes.
Further on, we may then see a temporary boost to the data as rebuilding takes hold in hurricane-damaged areas. We generally have a positive outlook regarding North American equity markets. Consumers are in a healthy position, we are seeing a rebound in business investment, and heading into hurricane season the U.S. economy had been growing at decent clip. What’s more, the outlook for global growth looks positive and synchronized. Overall, we expect underlying economic trends to remain positive and supportive of equity markets, while fixed income investors may face the headwinds of rising rates.
Table 1: Summary of major market developments
|Market returns*||September||Q3 2017||YTD|
|- in Canadian dollars||1.6%||-0.1%||4.4%|
|- in Canadian dollars||1.9%||0.7%||8.8%|
|MSCI Emerging Markets||0.3%||6.7%||21.3%|
|FTSE TMX Canada Universe Bond Index**||-1.3%||-1.8%||0.5%|
|FTSE TMX Canada all corporate bond index **||-1.1%||-1.3%||1.5%|
*Local currency (unless specified); price only
**Total return, Canadian bonds
Table 2: Currency and Commodities (in USD, % change)
|Oil (West Texas)||$51.67||9.4%||-3.8%||$51.67|
|Reuters/Jefferies CRB Index||$183.09||1.2%||-4.9%||$183.09|
Table 3: Sector level results for the Canadian market
|S&P/TSX sector returns*||September||Q3 2017||YTD|
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.