An incredible year for market returns and global economic growth
In 2017, we saw one of the strongest years for global market returns since the great financial crisis. Global equity markets seemed unaffected by political rhetoric, and geopolitical tensions in the Korean Peninsula and the Middle East. Instead the markets maintained strong economic fundamentals, which resulted in another strong year for corporate earnings. It bears repeating that equity markets can move up or down each month for many reasons but over the long term, market valuations tend to return to their fundamentals—and the fundamentals during the past year have justified markets moving higher.
Despite high consumer debt levels, a potential Canadian real estate bubble, and uncertainty surrounding the North American Free Trade Agreement (NAFTA), the S&P/TSX Composite gained 6.0% in 2017. A very strong economy in the first half of the year and a rebound in commodity prices resulted in a broad-based rally in the index. Nine of the ten sectors had a positive price return for the year. Oil as measured by West Texas Intermediate (WTI) advanced throughout the year by nearly 12.5 per cent to US$60.40 per barrel, which is likely to provide support for the index in the early part of 2018.
The United States
In President Trump’s first year in office, U.S. equity markets enjoyed double digit positive returns. The S&P 500, Dow Jones and Nasdaq were up 19.4, 25.1 and 28.2 per cent, respectively. American companies had another banner year with strong sales and earnings growth on the back of a strong economy. Employment continues to improve with a falling unemployment rate, recently at 4.1 per cent as of the end of November, after starting the year at 4.7 per cent. A tightening labour market will likely result in wage growth for the American consumer. Improving wages coupled with the recent U.S. tax overhaul should place many U.S. consumers in a strong fundamental position in 2018.
In overseas markets, international equities rose 13.7 per cent in Canadian dollar terms as measured by the MSCI EAFE Index. Brexit and tensions in the Korean Peninsula aside, the European economic outlook has dramatically improved. European manufacturing, as measured by the IHS Markit Purchasing Managers Index® (PMI), is at its highest level since the European debt crisis. Asia is also showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.
Central Bank policy
In 2017, the Bank of Canada tightened its interest rate policy to 1.0 per cent by announcing two rate increases of 25 basis points each, in July and September. The increases were considered significant, since the last rate increase was in September 2010. In 2018, it’s expected rates will increase very gradually as the Bank of Canada waits to see the impact to the economy from prior hikes, new stricter mortgage rules, minimum wage hikes in several key provinces, and NAFTA negotiations.
The U.S. Federal Reserve raised its overnight rate three times from 0.75 per cent to 1.5 per cent in 2017 and in October, started to reduce its $4.5 trillion balance sheet. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another three times in 2018 on the back of an improving U.S. economy.
We continue to believe the U.S., Canadian and International economies will grow in 2018 and that the risk of a recession is low. As a reminder, a positive economic environment doesn’t necessarily mean better returns. While we may be confident equity markets will deliver another year of positive returns, market volatility is likely to be much higher than we saw in 2017.