2018 has seen the emergence of some new trends. Volatility returned as stocks logged their first official correction since early 2016, coming on the back of a year (2017) that never saw a 3% decline – which hadn't occurred since 1995. Economic trends have also shifted - growth in Canada has slowed after leading the G7 last year, while U.S. conditions are seeing a boost from Washington's new tax reforms. In particular, corporate earnings have accelerated, with expectations for profit growth of nearly 20% for the S&P 500, the strongest in eight years.
Perhaps the most notable shift is in interest rates. Ten-year rates in Canada and the U.S. reached multi-year highs this year, including rising above 3% in the U.S. for the first time since 2014. Historically low interest rates have been a staple of this bull market. Thus, the lift in rates has been met with some anxiety in the stock market, reflecting the concern that rising interest rates will bring an end to the expansion. Consider the following perspective:
Stock markets have performed well during the initial 3% increase in the Federal Reserve's Fed Funds Rate
Performance data from Morningstar Direct. Past performance is not a guarantee of how the market will perform in the future. Indexes are unmanaged and are not available for direct investment. All returns expressed in local currency and include reinvested dividends.
Past performance is not a guarantee of what will happen in the future. Bond investments are subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value.
1Corrections measured by a 10% or greater decline in the S&P 500 index. Bond performance represented by the average return of the Barclays U.S. Aggregate Bond Index and the FTSE TMX Canada Universe Bond Index in Canadian dollars. Investment Indexes are unmanaged and cannot be invested in directly.