November was a month that ended being dominated by news of the emerging Covid variant, Omicron. Not unlike what happened earlier this year when the Delta variant was announced, stock markets around the world took a dive and a flight toward safer assets occurred. Thus, The US dollar gained 3.29% over the Loonie which acted as a partial hedge for the international holdings of Canadian investors. As well, 10 years government yields dropped by -0.1% and -0.13% in Canada and the US respectively. Consequently, the Canadian bond Universe ended November in positive territory for the first time since July, being up by 0.87%, while corporate bonds where up by a more modest 0.47%.
The shift for major equity indices was quite drastic over the month. Most were in positive territory until the announcement of the new variant. The US S&P 500 (US$) was up by 2.21% until the 24th of November before ending the month at minus 0.70 % and, nonetheless, being the best performing region for that month. The US market again held up better due to the resilience of larger cap growth names that have acted as defensive positions since the onset of the pandemic. As an example, Apple was up by 10.5% during the month. An equal weighted version of the S&P 500 where each company is 1/500th of the index was down by -2.55% which is more reflective of the broader negative results for that month. In Canada, the S&P/TSX was down by -1.62% (C$) for the month while emerging markets equities (MSCI EM, US$) and international equities (MSCI EAFE, US$) dropped by 4.07% and 4.64%, respectively. Similarly, Growth equities, down only 0.70%, held up relatively better than more cyclical Value stocks which lost 3.74% (MSCI World style indices, $US).
The debate around the other topic that investors have been discussing since earlier this year, inflation, and whether it proves to be transitory or not seems to have been settled, but it’s matter of definition. As quoted in the Financial Times, Mr Powell, the Fed Chairman said the following in front of the Senate finance committee:
“So I think the word transitory has different meanings to different people. To many, it carries a [sense of] time, a sense of [being] short lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean”
With the above comments in mind and with unemployment rates near pre-Covid levels in the US (4.2%) and Canada (6%) in November, the Fed and the Bank of Canada will likely pull back faster than expected their various support initiatives and start to lift up rates toward the middle of next year. However, in our opinion, they will proceed carefully for mainly two reasons. First, markets and the overall Covid situation remain fragile as illustrated by the events of November. Secondly, most of the current inflation comes from goods which can reverse as per the way the Fed understands the word transitory as there are limits to the number of dishwashers, cars, TVs or other goods that people need. These topics will likely continue to influence markets and our daily lives well into 2022.
We’d like to take this opportunity to wish our clients and collaborators Happy Holidays, hopefully with the possibility of seeing your loved ones.
In October, large cap developed economies rebounded as the S&P 500 returned a whopping 7.0% in US$, the S&P/TSX retuned 5.0% and the MSCI Europe generated 4.7% in euros. Small-caps weren’t left behind, as they returned 5.6% in Canada and 4.3% in the US. Style-wise, in US$ the MSCI World Growth (6.7%) outperformed its Value counterpart (4.6%), but they were neck to neck year-to-date with Growth having the slight advantage (19.8% versus 19.6%). In the absence of market turbulence, the VIX fear index fell to 14.8 on October 22nd, its lowest level since July 2nd.
On the currency front, foreign equity market returns were weakened by the strengthening of the commodity influenced loonie. The Canadian currency gained 2.9% versus the US dollar and 3.2% versus the euro. On the commodity front, oil dominated with a gain of 11.4% for the month, its year-to-date return is now 72.2%. Responding to inflation fears (5.4% in the US & 4.4% in Canada over the past 12 months), gold was up 1.6% on the month. It remains to be seen whether this price rise for the precious metal is just beginning, as its return is down 5.1% in the past twelve months. As for fixed income, the Canadian bond universe lost 1.1% and the corporate bond universe lost 0.9% as interest rates moved higher all along the rate curve, them too concerned with inflation.
In addition to progress towards a normal post-pandemic economy, equity performance was supported by a strong start to the earnings report season. As of the end of October, over 80% of S&P 500 companies that had reported results were beating earnings per share estimates and over 70% were beating revenue estimates in Q3. Companies were able to raise prices and maintain their profit margins despite supply restrictions as a healthy demand generated good sales results.
However, US GDP growth of 2.0% came in below expectations of 2.6% in Q3, hurt by shortages in the labour market and a empty store shelves. This phenomenon is not expected to pullback until summer 2022. Also, consumer spending, which makes close to 70% of the U.S. economy, increased by only 1.6% in Q3, far below the 12.0% pace of Q2. For Q4 GDP, analysts are eyeing as possible increased spending by consumers on services involving in-person interactions. As the fallout of Covid-19 insecurities decrease, Q4 GDP is expected to bounce back at the end of a year.
Meanwhile in China, the MSCI China Index lost 16.2% in US $ in Q3 resulting in its worst quarterly underperformance in 20 years against the MSCI World Index (-18.6%). Lower stock valuations paired with an undervalued yuan produce attractive entry points and rekindle our appetite for this battered stock market.
As of this writing, the stock market in November is continuing its positive momentum, good day everyone!
September was a turbulent month for markets with most of them ending in the red zone. The American large-cap index, the S&P 500, registered its worst performance since March 2020 by falling by 4.65% (in US$). Year-to-date as of September, the US benchmark is still showing a solid performance of 15.92%, however, mostly due to its strong showing in the first 6 months of the year. In Canada, the S&P/TSX fell by 2.22% (in C$) during the month. After 3 quarters, the TSX is the best-performing market this year, up 17.48%. Value stocks, down by 2.94% in September (in US$, MSCI World Value), did better than their growth counterparts which plunged by 5.19% (in US$, MSCI World Growth). This relative overperformance of Canada vs the US and Value vs Growth is largely due to the strong rebound in the Energy sector, up by 9.49% (in US$, MSCI World Energy) in September as energy commodity prices increased sharply, with oil up by 9.5% (US$, WTI) and natural gas up by 34% (US$). As for international equities (MSCI EAFE, US$) and emerging markets (MSCI EM, US$), they were respectively down by -2.83% and -3.94% in September.
Spike in energy prices was driven by various factors, notably lower natural gas inventory level in Europe and power outages in China as winter is approaching. In the case of China, some of the problems are self-inflicted as they stopped importing Australian coal in retaliation to increased tensions with that country. In addition, well-intentioned policies targeting a reduction in emissions were badly implemented leading to shortages and blackouts in country. Power outages in China will also have a cascading effect on the global supply chain which will continue to drive shortage of materials and finished goods.
Higher energy prices combined with a still rebounding economic activity, notably in developed countries, kept inflation statistics at higher levels. The US Core CPI, thus excluding volatile items such as energy and food, was at 4.0% in September vs the prior year whether the most recent comparable data for Canada was at 3.5%. For both countries, these levels remain high for the recent past although we do note more normalized month on month inflation numbers recently which would tend to confirm that it should be transitory. In the US, month on month core inflation averaged 0.84% per month in the 2nd quarter of this year vs 0.22%/month in the 3rd quarter. Nonetheless, 10-year rates in Canada and the US increased by 0.24% and 0.22% to end September at 1.54% and 1.52%, respectively. This resulted in poor showing for bonds in September with the Canadian bond Universe and the Corporate Universe being down -1.4% and -1.06% for the month.
All of the above in conjunction with the impact of the Delta variant have led economists to lower their GDP forecast for this year and increase it for next year. Bloomberg economists now expect a global growth of 6.6% in 2021 (down by 0.3%), 4.7% in 2022 (up by 0.3%) and a return to trend in 2023 (3.2%). What is of more pressing importance for markets are actions from central banks to higher inflation. The current consensus is that the Fed and the Bank of Canada will reduce their quantitative easing programs in late 2021 or early 2022. However, as there is still some slack in the employment market, most believe that both central banks will be cautious in terms of raising short-term rates which most views as taking place in the second half of 2022. However, a key downside risk to be monitored is how supply chain shocks will affect industrial activity. On this note, we hope you’ll be able to enjoy the last few warm days of the year.
Unfazed by the miscalculated withdrawal of U.S. troops from Afghanistan and the threat of the Delta variant against economic activity, the stock market continued its mighty journey “up & to the right”. August proved to be another solid month on the equity front as the S&P 500 US large Cap returned 3.0% pushing its year-to-date return to 21.6% and making 2021 its highest first eight months of a calendar year return since 1997. Moreover, from April 1st, 2020, to August 31st, 2021 (17-month period), the index returned on average 3.5% per month for an impressive cumulative return of 79.0%, lesser only to the Nasdaq Composite and US small cap Russell 2000 whom both returned 100.3%. The fierce battle between styles Value (+1.7%) and Growth (+3.3%) was won by Growth on the World equity stage in August just like it had also won it in June and July. On the Canadian fixed income front, the journey is far less prosperous as the bond universe returned a negative 0.1% in August and a shallow 4.3% cumulative since April 1st, 2020. Looking ahead towards autumn and colder temperatures, markets expect the Delta variant to trouble the economy of developed economies, but economic lockdowns are not expected.
Despite these good results, high inflation data in August continued to topmost investors concern (3.7% in Canada & 5.4% in the US). Although widely believed to be transitory, inflation data arrives at above analyst anticipation. Red hot North American economies have sustained strong recoveries out of the Covid bottom, but concerns are growing that the easiest part of the recovery is now in the back-view mirror and that their growth rates have drawn their high watermarks. While the US job creation hit a remarkable 943K in July, August hires were a setback as they came in at just 235K, much lower than the expected 733K. Nonetheless, central banks, are actively searching green markers to offload their hefty balance sheets. Jerome Powell, whose term as leader of the FED is up for reappointment in early 2022, hinted towards reducing the pace of bond purchases at year end (tapering). However, he also suggested that the economy still needed further improvement, notably on the job front, before any rate hikes were to be initiated, this guidance was welcomed by the equity market.
Meanwhile in China, even though GDP growth of 12.7% for the first six months of the year outpaced any other sizeable economy, the MSCI China index was down 27.0% since its February peak through the end of August. This poor result was predominantly caused by drastic regulatory measures outlined in our previous Market Review. Growing tensions between China and the West escalated a notch more in August as US authorities temporarily banned new Chinese IPO listings on US markets. The DiDi (Uber of China) listing debacle, ambushed by Chinese regulations on cyber security violations, is the root for this ban. Another problem, it became increasingly evident in August that the operations of China’s 2nd largest property developer, China Evergrande Group, were significantly hurt by the pandemic. Short on cash and high on debt, Chinese authorities quickly stepped in. If Evergrande defaults on its debt, 300 billion dollars or 2% of China’s GDP, it has the potential to create contagion and bring down several banks with it. Markets are very troubled by this situation in September, China will have to decide if the developer is “too big to fail”, to be followed…
In July, markets started the third quarter in dispersed order. The US’ S&P 500, helped by the technology and communications sectors, recorded the strongest performance for the month of July with 2.38% (US$), while the MSCI emerging markets had a more difficult time with a loss of -6.73% (US$). In between those two, the Canadian S&P/TSX (C$) as well as international equities (MSCI EAFE, US$) ended up slightly higher with gains of 0.80% and 0.76%, respectively. July also saw growth stocks outperforming value stocks by a notable margin, 2.95% vs. 0.65%, as per the style indices of the MSCI World ($US).
This more subdued performance and the gap between growth and value partly reflects short-term insecurity about the impact of the Delta variant on the gradual normalization of activities. Unlike the initial phase of the pandemic, the impact is currently expected to be greater for Asian and Oceania countries which have favored so far a zero-Covid approach. Thus, they started their vaccination campaigns later or are using less effective vaccines. By comparison, as of August 8, Canada had 61.8% of its total population fully vaccinated compared to only 17.9% in Australia. Restrictions are therefore gradually being put in place in these regions.
The manifestation of these concerns pushed the 10-year rates down in July by -0.19% in Canada and -0.24% in the United States. These rate movements gave the Canadian bond market and its corporate sub-segment their best monthly performance of 2021 with gains of 1.03% and 0.92%, respectively. Nevertheless, the economic fundamentals in the 2 regions remain solid for the moment with an average job creation of 943,000 in July in the United States, a monthly average of 593,000 since the start of 2021 and of 821,000 over the last 3 months. Announced financial results for the second quarter are also beating expectations. For S&P 500, 87% of companies beat expectations for revenues and earnings as per data compiled by Factset. Most of them also raised their expectations for the rest of the year. The situation may change quickly, but for now the trend continues to be in the right direction.
For emerging markets, in addition to the impact of the Delta variant, negative performance was also due to drastic regulatory actions taken by the Chinese government against certain large tech companies and towards private companies in the education sector. This debate about the power of big tech companies is everywhere. South of the border, the new head of the Federal Trade Commission (FTC), Lina Khan, wants to tackle this challenge which could possibly affect some of the companies that have performed best on the stock market over the past 10 years.
With that, we hope you continue to enjoy the summer.
The Canadian S&P/TSX Index continued its positive trend in June with a return of 2.48% (in C$) for the month allowing it to end the first six months of the year with a cumulative performance of 17.28%, largely due to the continued rebound in the energy sector, 6.4% in June and 37% year-to-date. The other main sector of the Canadian market, the financial industry, took a pause in June (+ 0.7%) but is still showing a strong year to date performance of + 23.4%.
The US S&P 500 Index also closed the first half of 2021 with a positive performance of 2.33% (in US$) in June and is up 15.25% after 6 months. As for international equities (MSCI EAFE, US$) and emerging markets (MSCI emerging countries, US$), they are showing respectable year to date performance of 9.17% and 7.58% respectively, following mixed results in June (-1.1% and 0.27%).
What has held the attention of most financial strategists and economists for some time now is the rise in inflation and how it could influence central banks’ decisions. In June, US inflation numbers showed a significant increase of 5.4% or 4.5% if energy and food are excluded on a year over year basis. Despite this large jump for a second month in a row, the consensus remains that this phenomenon is transitory, mainly resulting from certain industries particularly affected in 2020. Notably, energy, used cars and plane tickets posted significant inflation of 24.5%, 45.2% and 24.6% respectively in June.
At the moment, the market agrees with this consensus view with short-term rates rising while long-term rates retreated slightly. Canadian 2-year rates ended June at 0.48%, up 0.16%, while 10-year rates fell 0.10% to end the month at 1.45%. With credit spreads remaining stable, the drop in long-term rates propelled the bond market to its best month in 2021. The Canadian bond universe gained 0.96% while Canadian corporate bonds were up by 0.70% in June.
No major central bank has to date announced any significant tightening in monetary policies in response to rising inflation. With the continuation of the gradual reopening in developed economies, the consensus reported by Bloomberg is that growth will remain on track for the remainder of 2021 with employment catching up in sectors more strongly hit. Closing the gap on lost jobs will be the main criteria dictating how central banks and governments will behave with regards to support measures put in place during the crisis unless inflation truly gets out of control. As for the markets, the second-quarter results will draw attention, especially companies' comments on the impact of price increases and supply chain disruption on their cost basis and margins. In our opinion, companies will be relatively cautious in their projections which could moderate the markets for the second half of 2021 after the strong performances observed to date.
Although there will be no parade to celebrate a 25th cup in Montreal, we hope you are nonetheless enjoying your summer!
Fuelled by fears of inflation and rising interest rates, returns in global markets were more volatile in May. Converted to Canadian dollars, ex-US international equities and emerging markets equities gained 1.6% and 0.6% respectively, while US large-cap and small-cap stocks lost 1.1% and 1.4% respectively. Foreign equity market returns were once again weakened by the strength of the Canadian dollar, which appreciated 1.8% during the month, taking the loonie’s appreciation to more than 20% since its low in March 2020. Trading at US $ 0.83, our currency hits a peak previously reached in May 2015.
Value-style stocks have responded well to fears of inflation and rising rates. They outperformed their growth-style counterpart by 3%, fuelling the performance gap between the two styles to 14% since September 1st 2020 to the advantage of the value style. In our domestic market, the cyclical-biased S&P/TSX index continued its momentum with a return of 3.4% fuelled by the performance of its 3 main sectors: Financials at 4.4%, Materials at 7.9% and Energy at 4.4%. It should be noted that over the past 12 months, the return of Canadian equities at 33.8% surpasses that of American large-cap equities (22.9%) as well as that of international equities (21.7%) and those of emerging markets equities (32.3%), all in CAD. But this is only a small consolation given that over the past 10 years, Canadian equities have underperformed global equities (MSCI ACWI) by annualized 5.8% return!
As for fixed income, the Canadian bond universe gained + 0.6% and the corporate bond universe gained + 0.5%. Gold rose by 7.6% to US $ 1,902.50 partly on inflationary fears of the recent months.
Equity markets took a temporary step back when the US consumer price index jumped to 4.2% in April (5.0% in May). This surprise caused the VIX Markets Fear Index to jump by 48% to a high of 28.9 before it closed the month lower at a level of 16.8, a decrease of 12% from April. As the global economy is exiting the grip of the pandemic, some market participants fear that inflation will stop this stimulated environment sooner than expected.
However, the US Federal Reserve (FED), has shown little concern, viewing the rise in inflation as transitory. It estimates that the inflation statistics will be more volatile in the coming months. The Fed also anticipates that inflation will target certain sectors of the economy fuelled by the build-up of demand caused by the lockdown (such as the costs of plane tickets, new & used cars and energy). Once these spikes in inflation have passed, the Fed expects inflation to be moderately above its historic target of 2% for the year. It is also keen to see the economy absorb the shortfall of 10 million jobs and does not want to put the brakes on until that goal is achieved.
The bond market appears to agree with this view as interest rates on federal bonds edged down slightly along the curve in May. A 10-year US government bond offers an annualized return of 1.58% in the US (1.65% as of April 30) and 1.54% in Canada (1.59% as of April 30) which does not signal upcoming high levels of inflation.
Enjoy what is left of this beautiful spring and make the most of this nice summer a head of us!
Markets continued to advance for a third consecutive month in April. Topping the list, the S&P 500 finished up 5.34% (in US $), followed by international equities with a gain of 3.09% (MSCI EAFE, in US $) for the month. The MSCI Emerging Markets (US $) and the Canadian S&P/TSX indices also had a strong monthly performance, appreciating by 2.50% and 2.39%, respectively. After 2 months of favoring value stocks, April saw growth stocks regaining investors’ preference with gains of 6.33% (MSCI World Growth, US $) compare to 3.21% for the value index (MSCI World Value) . Finally, the appreciation of the Canadian dollar against the US currency subtracted -2.31% from US denominated returns.
Minister Freeland presented her first official budget in April. According to an analysis by Bloomberg economists, about a third of the additional spending of 101 billion over the next 3 years is an extension of the Covid related measures already in place. Otherwise, the largest share will go to a new Canadian child care program based on the model we have in Quebec. Some may decry or minimize the scope of this program, but studies by Professor Luc Godbout of the Université de Sherbrooke have found that the Quebec system helped increased the participation rate of women in the labour force which had a measurable and lasting positive impact on the province GDP. Consequently, this social program, if properly implemented, could have a significant and lasting impact on the Canadian economy. South of the border, the Biden administration has started leaking information about what infrastructure plan it wants to put in place. This plan is valued at 2.25 trillion US $ (!!!) or 280 billion per year over 8 years and promises to be difficult to negotiate with Congress since it involves tax increases, both corporate and personal. The first estimates by Bloomberg economists predict an impact on annual GDP of 0.1%/year and 2.2 million jobs created with the majority of the program in physical infrastructure and the balance invested in research & development, education and health. It appears to be a lot of money for little real impact.
After a few difficult months, bond markets posted a slight positive performance of 0.06% for the Canadian universe and 0.01% for the corporate segment in April. This performance contrasts with the spectacular rebound in certain commodities over the past year. Notably, lumber whose one-month forward contracts were up 48.7% in April and nearly 369.3% year-on-year. Other commodities playing an important role in transport and industrial value chain, oil and copper, have seen significant gains during the last 12 months, at + 237.5% and + 90.3%, respectively.
Some observers point to these increases as proof that the return of inflation is only a matter of time. While this is possible, it is worth remembering that the supply of a raw material that grows or needs to be extracted, in other words the total quantity available at any given time, is relatively fixed over the medium term. Prices are therefore the first conduit through which a demand shock manifests itself before output adjusts. We suffered a major demand shock during the spring of 2020 followed by a strong rebound in some sectors, which partly explains supply disruptions and adjustments. To have a lasting inflationary impact, these imbalances would have to become nearly permanent. It is too early to say, but it is true that residential renovation projects will cost more in the coming months.
Exceptionally, only available in French this month