The U.S. market continued to outperform most other markets around the world during the third quarter. The S&P 500 Composite Index was up 5.8 percent in Canadian dollar terms, while the Dow Jones Industrial average climbed by 7.1 percent. Economic growth also remained strong, while inflation stayed in check. In Canada, the S&P/TSX Composite Index declined 0.6 percent as tensions around NAFTA talks weighed on Canadian stocks. The new U.S.-Mexico-Canada Agreement, which was announced on October 1, removes a massive cloud of uncertainty for policymakers and businesses, and paves the way for a stronger Canadian dollar, higher interest rates and better equity returns in the fourth quarter.
Canadian resource stocks fall
In Canada, resource stocks – metals and mining in particular – led the way down, while commodity prices dropped due to strength in the U.S. dollar and concerns around slowing Chinese economic growth. Crude oil was the one major commodity that did see prices rise, ending the quarter at a four-year high, as worries around supply mounted. Even so, Canadian energy stocks struggled after the Federal Court of Appeal quashed the Trans Mountain pipeline expansion. The health care sector was the clear standout on the upside, driven by gains in cannabis companies.
U.S. earnings growth remained strong
U.S. gains were partly a result of a continuing tailwind from corporate tax reform, which has lifted year-over-year earnings growth to nearly 25 percent for three quarters in a row. Technology, industrials and health care all climbed higher, driven by a strong growth outlook and consumer and business confidence hitting multi-decade highs. As in Canada, the materials and energy sectors, both impacted by weaker commodity prices, lagged the most. Interest rate sensitive industries, such as real estate and utilities, also underperformed as treasury yields came close to multi-year highs.
International markets struggled
Most international markets declined, too. While the MSCI World Index did advance 3.2 percent in Canadian dollar terms, that was mostly due to strong performance in the U.S. and Japan. The MSCI Asia Pacific and MSCI Europe indices were down 1.3 percent and 1.0 percent, respectively, in Canadian dollar terms. European equities were burdened by growing trade concerns, potentially destabilizing political developments in Italy and fears of contagion from a currency crisis in Turkey. Stocks in Britain also fell over growing fears of a disorderly Brexit.
Fixed income prices fall
Both the U.S. Federal Reserve and the Bank of Canada raised their overnight rates during the quarter, causing North American bond yields to rise and prices to fall. Some international bond markets experienced sharp selloffs over fears that a Turkish currency crises, sparked in part by a rising U.S. dollar, would spread to other countries with high U.S.-dollar debt. So far there has been little impact on developed country markets.