The dog days of summer are now behind us and true to form, July and August passed without much fanfare. All eyes were on September, traditionally the worst-performing month of the year. Again, in line with history, we saw an increase in volatility and a bit of a market retreat. Much of September’s movements could be attributed to headline news, brought on by the central bank policies, oil, and of course, the first U.S. Presidential debate. The key thing to remember is that sometimes news is just news and should be treated as such.
The Canadian equity market continued its strong performance in the third quarter with a gain of 5.5% including dividends as measured by the S&P/TSX Composite Index. Unlike the first half of the year, third quarter gains were not on the back of oil and gold, as both commodities were essentially flat, quarter-over-quarter. Oil prices were mired in a very tight trading range for much of the period but jumped at the end of the quarter thanks to a tentative production cap agreement by OPEC producers. While details still need to be ironed out and there are no guarantees the agreement will be upheld by all parties, the fact that these countries were able to agree on something is a step toward reducing global oversupply conditions. Any potential for higher oil prices would benefit energy-related stocks and the S&P/TSX overall.
Central Bank Policy
The U.S. Federal Reserve remains hesitant to raise interest rates, again holding them at 0.5% at their September meeting. Despite a strong labour market and steady inflation levels, the central bank is sensitive to global economic risks and the potentially negative impact a higher interest rate may have on the U.S. dollar. The Fed did, however, allude to the likelihood of an increase at their December meeting.
The United States
In the United States, the S&P 500 Index gained 3.9% including dividends in U.S. dollars. Adjusting for the Canadian dollar, U.S. equities were 4.7% as the Canadian dollar fell by 0.8% quarter-over-quarter. Amidst a decent but not strong economic environment, U.S. corporations are still finding it difficult to generate profits. While consumers are in a better financial position than they have been of late, they remain reluctant to spend. Their focus is on the upcoming U.S. election and the uncertainty their country faces. The top two candidates are running virtually neck-and-neck and the outcome is not likely to be evident until after the polls close on November 8. Investment professionals are digesting and analyzing the two platforms in an effort to predict potential market impact. Regardless of the outcome, uncertainty breeds volatility, therefore the markets are expected to move in a somewhat sideways direction until there is more clarity.
European and Japanese central banks continue to try to stoke economic growth through negative interest rate policies. The Bank of Japan recently announced a policy shift after realizing their previous plan was not achieving intended results. Only time will tell if this new policy will pull Japan out of their long-standing economic woes. Equity investors were encouraged by the accommodative central bank policy, pushing European and Japanese stocks up 5.5% and 8.8%, respectively in U.S. dollar terms, as measured by the MSCI indices. In Canadian dollar terms, the indices gained 6.3% and 9.7% respectively. The broader MSCI EAFE Index, a gage of collective international stock markets, gained 7.4% in Canadian dollar terms.
Bonds continue to be a steady performer in client portfolios. Canadian bonds gained 1.2% in the quarter as measured by the FTSE/TSX Universe Bond Index. With the Bank of Canada holding its key rate firm at 0.50% for now, an attractive interest rate continues to be an endangered species. From an income perspective, traditional fixed income continues to fall short of investors’ needs, especially after factoring in the impact of inflation and taxation.
Market volatility is likely to remain through the rest of 2016 and into 2017, driven mostly by headline news. Yet, despite the uncertainty, the investment environment is solid, if unspectacular. Misplaced fears of an imminent global recession brought on by the ‘Brexit’ vote have subsided and U.S. business is improving. Oil, alongside the S&P/TSX, likely bottomed back in February and is showing signs of improvement. If anything, these levels of volatility provide opportunities to take advantage of any market pullbacks; adding to our positions on the dips, through a regular investment plan. We continue to encourage balance among many asset classes – Canadian equities, U.S. and foreign equities, bonds and cash – as a diversified approach will help mitigate volatility while working toward our objectives.
At Insightful Wealth Group we continue to monitor the current market conditions, fund managers portfolios and each client’s holdings to be sure we are in line with the markets and your objectives. Should you wish to discuss your accounts or holdings with us, please don’t hesitate to call us to set up an appointment.