Politics and policy (monetary, fiscal and trade) remained front and centre last quarter, but competed with fairly positive incoming economic data for control of market performance. The result was further gains for stocks at large, though performance across asset classes varied. Canadian stocks continued to lag while international investments posted stronger gains, including new highs in U.S. equities. While volatility remained fairly low, spates of investor nervousness emerged. The average daily move in the quarter for the S&P 500 and TSX was nearly identical to the previous quarter, but the percentage of down days did rise to 49% for the S&P 500 and 56% for the TSX.1 This is a good reminder that 1) The investment backdrop contains a mix of risks and opportunities, 2) Volatility is likely to rise from historically low levels and, 3) It's important to view performance over longer periods because daily swings do not tell the whole story.
Source: Morningstar Direct, 6/30/2017. All returns in local currency and total return. Representative indexes are: Real Estate: S&P Canada REIT Index, High Yield Bonds: Barclays High Yield Canadians Index, Canada Large-cap Stocks: S&P/TSX Composite Index, U.S. Small- and Mid-cap Stocks: Russell 2500 Index, International Bonds: Barclays Global Aggregate Bond Index , Canada Bonds: FTSE TMX Canada Universe Bond Index, U.S. Large-cap Stocks: S&P 500 Index, Emerging Market Stocks: MSCI EM Index, Overseas Large-cap Stocks: MSCI EAFE Index. 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.
Domestic stocks lagged
– After leading all other equity asset classes with a 21.1% gain in 2016, domestic stocks trailed in the second-quarter, declining 1.6%. Weakness in the energy and materials sectors (down 8.3% and 6.4%, respectively) was the primary driver, spurred by a 9% decline in oil prices.1
Canadian stocks trailed bonds — even as interest rates surged at the end of the quarter. The abrupt increase in interest rates was spurred by rising potential for a rate hike from the Bank of Canada in response to better economic growth in the first half of the year.
Global markets extended gains
– International investments continued to lead the way, riding optimism over the outlook for better U.S. growth and persistent signs of traction within the European economy. The passing of the French presidential election also brought a bit of relief to the ongoing political anxiety. Overseas large-cap stocks outperformed again, the 4th consecutive quarter the asset class has outpaced Canadian stocks.
Policy risks, tech selloff and commodity weakness spurred some volatility
– Policy uncertainties emanating from Washington D.C. as well as indications that global central banks are looking at throttling back stimulus stoked spurts of volatility. Turmoil surrounding President Trump prompted concerns that the administration could be distracted from executing its pro-growth agenda, though politically-charged market dips were fairly short lived. The hard-charging technology sector, which had risen 34% over the past year, experienced some fatigue, dropping 4% toward quarter's end, pulling the S&P 500 down from record highs.2
The TSX has little technology exposure, but was instead hurt by the sizeable exposure to commodities, which dropped 5.5% in the period.3