The third quarter was a pleasant surprise for stock markets worldwide as investors shook off a variety of concerns and bid equities higher. Considering the shocking “Brexit” vote that closed out the second quarter, perhaps the most surprising aspect was the unexpected resilience of the U.K. economy, at least in the short term. Although the Pound Sterling continued to plumb new lows, the U.K. stock market proved one of the best performing in the world in local terms. (Don’t expect this to last – at quarter’s end British Prime Minister May raised the specter of a “hard Brexit” and added renewed pressure to the Pound and capital markets by setting a date for invoking formal withdrawal negotiations and indicating immigration issues would be given priority over keeping access to the single market).
Also surprising was the lack of volatility in the summer months, despite concerns over Brexit, the U.S. election campaign, the Italian banking system, and other geopolitical tensions. Traders were calling it the quietest summer in twenty years, as the S&P 500 through July and August recorded its longest stretch since 1928 without a daily move of more than 1.0%. Things got quickly back to normal in September as central bankers around the world started making headlines with monetary policy musings.
In North America, major equity indices tracked higher in the third quarter as mixed economic news over the summer kept the Federal Reserve on the sidelines.
In North America major equity indices tracked higher in the third quarter as mixed economic news over the summer kept the Federal Reserve on the sidelines and pushed interest rate hike expectations out to December. Sovereign yields in both Canada and the U.S. reacted by pushing to new lows, with ten-year government bonds dipping below 1.0% late in September.
In Toronto the low rates helped the S&P/TSX Composite continue its second quarter advance through the first half of the third quarter before leveling out and finishing the quarter up 5.4% or +13.2% year-to-date. The continued strength in equities came despite a lack of support from oil prices, gold, or the value of the loonie, all of which moved sideways or slightly down for the quarter.
All the major U.S. equity markets advanced, led by technology, financials and industrials. While the S&P 500 and the Dow Jones Industrials posted modest gains of 5.4% and 3.7% in Canadian dollar terms, strength in the technology sector was such that the tech-heavy NASDAQ Composite roared ahead +11.5% ($C).
Much like the Canadian index, most other world markets continued their post-Brexit vote bounce through July before drifting sideways through the end of the quarter. The MSCI World Index, MSCI Europe Index, and MSCI Asia Pacific indices finished the quarter with gains of 6.5%, 7.0% and 10.9% respectively in Canadian dollars.
The fourth quarter promises plenty to keep investors watchful. October earnings season will shed light on the health of U.S. corporate earnings, November brings the U.S. election, and December the anticipated Fed action. Meanwhile the implications of Brexit should begin to look a little more real as the announced March 2017 trigger deadline draws nearer.