Stocks in both Canada and the United States advanced each month through April, May, and June (the TSX touched a new all-time high in June), as an economic Goldilocks scenario seemed to be emerging in the U.S. Economic growth showed signs of accelerating and unemployment hit multi-decade lows, with only modest inflation. S&P 500 quarterly reporting in April and May had corporate earnings and sales growth well ahead of expectations; up about 24% versus a year ago, a remarkable jump even accounting for a one-time lift from tax reform. Canada’s economy paced a little slower, well off its breakneck growth a year ago, and April saw the IMF trim its growth outlook for Canada. But by the time June’s Bank of Canada policy meeting rolled around, the central bank was confident enough to remove some of the cautionary language in its statement, even though tensions with the U.S. continued to build around NAFTA negotiations, and steel and aluminum tariffs.
Canada’s S&P/TSX Composite Index finished up +6.8%, its strongest quarterly showing in almost five years. Energy was a leading contributor to performance as oil prices climbed to three-year highs. Missile strikes on Syria, the re-imposition of sanctions on Iran, and new sanctions on Venezuela, all rattled energy markets. The Canadian sector got a further boost on news the federal government was buying the Trans-Mountain pipeline expansion project. Crude prices retreated somewhat in June as Russia and OPEC agreed to raise output to cool the market, but the details of the actual deal sent prices upward again. U.S. markets were buoyed by energy as well, but to a lesser degree. The S&P 500 Composite Index was up +5.1% CAD and the Dow Jones Industrial Average +2.8% CAD, with returns to Canadian investors benefiting from a stronger U.S. dollar. Both countries’ markets also saw strength in technology shares, especially the mega-cap tech names that saw the biggest declines in the first quarter’s correction.
Canadian government bond yields rose alongside U.S. treasury yields through April and May before reversing course and ending the quarter near where they had started. The retreat in yields came first in response to political chaos in Italy, and then due to the sharp escalation of trade war fears. The higher interest rates through most of the period put pressure on so-called “bond proxies”: the utilities, staples, and telecom sectors underperformed in both the S&P/TSX and S&P 500 indices.
The MSCI Europe Index managed only a slight rise of 0.8% $CAD. In addition to trade tensions and political turmoil, economic data showed a modest, but widespread, slowdown in growth during the quarter. Concerns about trade restrictions hit Asian shares particularly hard. The MSCI Asia Pacific Index, which has struggled since peaking in January, fell -1.3 $CAD. Despite the difficulties in overseas markets, the strength in North American equities lifted the MSCI World Index to a gain of 3.9% $CAD.