First Quarter in Review

A strong start to the year gave way to a pullback in equities as the prospects for rising inflation and fears of a potential global trade war weighed on investor confidence. Despite the market’s renewed focus on rising rates, bonds slightly edged-out equities in the quarter for the first time since the second quarter of 2016.1
Quarter in Review chart

Source: Morningstar Direct, 3/31/2018. 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 Largecap 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. All returns expressed in local currency and include reinvested dividends.





The return of volatility – After trending near record low levels for much of 2017, market volatility made a comeback in the first quarter. Concerns of rising inflation and the potential for more aggressive policy tightening from the U.S. Federal Reserve  sparked initial volatility. Daily fluctuations in the stock market averaged 0.9% in the first quarter, three-times larger than the average for all of 2017.2

Stock markets hit a correction – The S&P 500 fell 10% from its January highs, recording the first official correction in two years. The TSX was also under pressure, dropping 8%. The Canadian and U.S. stock markets have now experienced four and five 10% corrections, respectively, since the bull market began in 2009. For perspective, stocks have historically averaged one correction per year.

Rates reached multi-year highs – While interest rates are still at fairly low levels — historically speaking — they moved notably higher in the quarter. 10-year rates in Canada and the U.S. rose to their highest levels since 2014, reflecting economic growth and firmer inflation expectations. 2-year rates rose above 2% in the U.S. for the first time since 2008 (domestic yields are below 1.8%), indicating recent and upcoming rate hikes from the Fed.

Important Information:

Past performance of the markets is not a guarantee of what will happen in the future. Equity investments carry risk, including the loss of principal. There are special risks inherent in international investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks.


Sources:

1. Equities represented by an equal mix of the S&P 500 Index and the S&P/TSX Composite.
2. Daily price change for the S&P 500.

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