Markets rise in second quarter on supportive Central Bank comments
The second quarter delivered positive returns, adding onto its gangbuster start in Q1, and helped in no small measure by the US Federal Reserve indicating the possibility of a rate cut in the second half of 2019. Although ongoing trade disputes unsettled investors for much of the period, equity markets around the globe moved higher, while bond prices also climbed (yields fell) as central banks maintained an easy monetary policy stance.
Market Returns
In Canada, the S&P/TSX Composite Index benefited from strength across most sectors to generate a return of 2.6% for the quarter, bringing the equity benchmark’s overall gain to 16.2% year-to-date. The energy sector, which includes pipelines, was the exception down 3% in the quarter (exploration and production companies were down 12%) as sentiment towards the energy sector remains depressed. Although valuations are startlingly cheap by historical measures, the sector will likely need visible pipeline progress and a better commodity price environment to attract investment flows.
In the U.S., the S&P 500 Index reached new all-time highs early in the quarter and finished the three-month period 2.2% higher in Canadian dollar terms. Early Q2 reports from companies indicate revenue and earnings for the quarter should beat consensus.
International markets also registered modest gains, and the MSCI Europe Australia Far East Index added about 1.7% for the quarter, also in Canadian dollars. Emerging markets were weighed down by China/ Hong Kong concerns and declined 1.5% in the quarter.
Fixed Income
The Bank of Canada maintained its overnight lending rate of 1.75%, noting that economic growth had been slower than initially anticipated at the beginning of the year. This was positive for bond prices and the FTSE Canada Universe Bond Index, a broad measure of Canadian government and corporate bonds, returned 2.5% for the second quarter. The stand pat guidance around rates was part of the reason for the Canadian dollar strengthening 2% against the U.S., where rates are expected to be cut. Lower yields have been pushing investors towards higher yielding assets such as corporate bonds and high yield, resulting in the yield pick-up in those areas being compressed. The exception to this is preferred shares as they continue to trade with wide credit spreads as investor sentiment remains weak and we feel have interesting value for the risk tolerant.
Market Outlook
Many of the conditions that have supported market growth in recent years such as low interest rates, measured economic growth and expanding corporate earnings are expected to continue in the near term. Nevertheless, the current recovery has not been without temporary corrections or bouts of volatility and as the economic cycle ages, the importance of high quality resilient businesses in your equity portfolio increases. We also like to see businesses with a track record of shareholder friendly actions such as a growing dividend, stock buybacks and debt reduction as a “life jacket” against stormy weather (see Bella picture below).
Summer Reading
RBC has a new podcast called RBC Disruptors – one of their latest is titled “Rewiring the Brain” and discusses how technology is disrupting your brain (many of us can relate to that). You can read a summary of their findings here, or you can download/stream the full episode wherever you listen to podcasts (Apple Podcasts/Soundcloud/ etc.).
If you have any questions about your portfolio or your overall financial plan, please do not hesitate to contact our office. In the meantime, we hope you and your family have a safe and happy summer.
(L) Our team once again supported Kanata Race Day, another great success this year raising funds for youth programming and recreation. RBC is also the title sponsor of RBC Race for the Kids on Sept. 15th!
(R) After the heat wave, Sarah’s dog Bella getting ready to go for a dip.