Q2 2018 Market Commentary

Challenges in the quarter

Despite continued trade dispute chatter, North American equity markets finished the quarter in positive territory as investors focused on strong sales and earnings growth in the region. In Europe, political concerns in Italy bubbled to the surface as anti-Euro parties gained strength, creating concerns about more ‘exit’ talk like what we saw in Greece in 2011. Emerging markets weakened on concerns about the impact of a rising U.S. dollar on their fiscal positions. Looking forward, the market is likely to move sideways until the ‘tit for tat’ tariff policy settles.

Canada
The S&P/TSX outperformed in the second quarter, rising nearly six percent due to the increase in the price of oil. West Texas Intermediate (WTI) rose nearly 14 percent to finish the quarter at USD$74.15. Higher oil prices resulted from a lower-than-expected supply increase by OPEC and Russia and a continued draw on global oil inventories. In the coming months, attention will focus on the resolution to the North American Free Trade Act (NAFTA), and the impact on the Canadian economy of higher interest rates, stricter mortgage lending rules and minimum-wage-increases across many provinces.

The United States
There’s no doubt equity investors were reacting daily to news about tariffs between the U.S. and China or the European Union. Despite fears of potential trade wars, the S&P 500 rose nearly three percent in U.S. dollar terms. The impact that tit-for-tat tariffs between nations could have on global economic growth are concerning. Since it’s difficult to quantify geo-political chatter, until tariff measures are realized, investors would be better served to focus on the fundamentals.

Overseas
In overseas markets, international equities were down 2.3 percent in U.S. dollar terms as measured by the MSCI EAFE index. Internationally, returns were driven by trade tariff fears, Italian political instability, and a strong U.S. dollar. Setting aside the potential for trade wars, Europe and Asia’s economic outlook continues to be robust and this will likely flow through to company earnings. Combined with accommodating interest rate policies, this part of the world will likely experience strong market returns.

Central Bank Policy
In the second quarter, the U.S. Federal Reserve continued raising interest rates in increments of 0.25 percent to 2.00 percent. The U.S. Federal Reserve is expected to continue to raise its benchmark rate two more times by the end of the year, on the back of strong US economy.

The Bank of Canada didn’t raise interest rates during the second quarter and the overnight rate remains at 1.25 percent. It’s expected rates will increase very gradually with one more this year.

Looking forward
Recent market volatility, driven primarily on trade war rhetoric should subside as cooler heads prevail. Market returns are expected to be driven by fundamentals and interest rate policy. Fundamentals continue to be strong—the likely explanation for higher interest rates. In this environment, equity markets will likely be positive but may not experience the above-average returns we’ve seen in the past couple of years.