Weekly Market Update (April 16 – April 20, 2018)

Canadian stocks rose with oil prices, and U.S. stocks edged higher on the week, adding on to the previous week's 2% rally, leaving the S&P 500 flat year-to-date. Stronger-than-expected earnings growth of 18% for the S&P 500 have helped stocks move higher, but potential causes of volatility, including additional tariff proposals and rising interest rates, continue to be headline risks. Through volatile markets it's important to take a long-term perspective and remember that market returns are driven by economic and earnings growth over time, and both appear positive, in our view.  

The market has spent the last two months focused on worries of a trade war and swirling political uncertainties. Last week brought a welcome – and positive -- distraction as corporate earnings announcements grabbed the spotlight. Canadian and U.S. stocks posted gains on the week. The TSX remains in negative territory for the year and 6% below its record high, while the S&P 500 has now rebounded 3.5% from the April lows, pulling the U.S. market back near even for 2018 and within 7% of the January highs. 

Policy and political concerns are not gone, nor is the volatility they'll spur as they jump in and out of the headlines. But our view that the broader bull market still has gas left in the tank is supported by the positive foundation of further economic and earnings growth, as last week demonstrated. Here are our key takeaways:

• The power of profits – Earnings season is under way, with quarterly results announcements from many bellwether U.S. companies including General Electric, Procter & Gamble, and JP Morgan Chase. Less than a quarter of S&P 500 companies have reported so far, but the early indications are positive, with earnings growth averaging better than 18%. Of note is that profits are getting a strong boost from an uptick in sales growth (as opposed to just cost cuts), suggesting that economic conditions are supporting demand.  This is an encouraging signal, and it sets a positive stage for the markets this year. For the full year of 2018, earnings are expected to rise by 18%, the strongest annual rate of growth in eight years.¹ While large daily market swings are likely to continue, history shows that earnings trends tend to dictate the broader direction for the market.  
• Rising interest rates don't yet mean falling stocks – 10-year rates rose in Canada and the U.S.  last week, nearly matching the highs for this year – levels last seen in early 2014. Two-year rates have also risen steadily and are now at their highest level in more than nine years.  Interest rates are higher for positive reasons, driven by solid economic prospects and the implications for slightly higher inflation. However, this also raises the prospects for tighter central bank policy as we progress, which at some point will begin to curb GDP growth. Over time, we expect higher rates to increase borrowing costs and narrow the attractiveness of stocks relative to bonds. But rates are coming off of historical lows and have not yet reached levels that choke off growth. For perspective, when stocks began to fall in '00, 10-year yields were nearly 7%, and they were above 5% at the peak in '07. Today, 10-year rates are still below 2.5% in Canada and 3% in the U.S.
• Leadership matters – Volatility has risen and stocks have pulled back since January, but a look at recent performance highlights two things: 1) leadership is not signaling the bull market is exhausted and 2) diversification is important. Commodities rose notably last week, reflecting rising crude oil prices (a result of OPEC production and U.S. stockpile trends) and ongoing worries of a global trade war. Higher oil prices have offered a lift to the resource-sensitive TSX. A broader look across asset classes shows that U.S. small-cap and emerging-market equities outperformed last week and year-to-date.  Similarly, sectors like consumer discretionary, technology and energy have been leaders this year. These categories are more cyclical and sensitive to economic growth, suggesting that the outlook for an ongoing expansion and bull market – while not without challenges as reflected by recent volatility -- is still intact. 

^{Source: 1. Factset Earnings Insight.}

Index	Close	Week	YTD
TSX	15,484	1.4%	-4.5%
S&P 500 Index	2,670	0.5%	-0.1%
MSCI EAFE	2,051	0.4%	0.0%
10-yr GoC Yield	2.34%	0.09%	0.29%
Oil ($/bbl)	$68.38	1.5%	13.2%
Canadian	US $0.78	-1.1%	-1.4%

Source: Bloomberg, 4/20/2018. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The earnings season will take center stage next week, with more than one-third of the companies in the S&P 500 reporting first-quarter results. Economic data will be light on the week with wholesale trade sales being the only notable report.