3rd Quarter in Review

Stocks gained more ground in the third quarter, helped by positive economic readings at home and abroad. Bonds posted their worst return in three quarters as interest rates rose following two Bank of Canada (BoC) rate hikes.
Quarter in Review chart

Source: Morningstar Direct, 9/30/2017. 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.

Volatility ebbs and flows – Investors faced a range of market emotions, with the volatility index reaching a record low and a nine-month high in a three-month span. Healthy economic data, solid quarterly earnings growth (+7.9% for the TSX and +10.3% for the S&P 500) and still low interest rates were calming forces, though growing tensions between the U.S. and North Korea did supply some anxiety, driving a brief 2% pullback in stocks in August.

International leadership continued – Global equities added to their gains, with emerging market and U.S. small- and mid-cap stocks leading the way. After moving sideways for much of the year, Canadian equities logged a 3.7% gain, the strongest quarter since Q4 of 2016. Real estate and Canadian investmentgrade bonds lagged, finishing the quarter in negative territory reflecting challenges in the domestic real estate market and negative effects of higher rates.

Policy and politics in focus – Ongoing uncertainties in the policy environment periodically tempered enthusiasm with gridlock in Washington capturing most of the attention. We continue to believe that the expectations and execution of the Trump administration’s economic agenda will not fully sync up, leading to more episodes of political optimism and disappointment. The monetary policy pendulum swung as well, with two BoC rate hikes in the quarter as domestic GDP growth remained elevated.

Action for Investors - Market performance highlights the importance of proper expectations for investors. While the bull market remains intact, increasing policy uncertainties will continue to populate the list of risk factors that are likely to spur higher market volatility and potentially a more meaningful dip in stocks than experienced lately. Prepare for additional market swings and more moderate returns by proactively rebalancing your portfolio.

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