In the last quarter of 2018 North American stocks plunged into “correction” territory, beginning with a freefall in October. Markets reacted to another U.S. interest rate hike, while trade tensions, signs of slowing global economic growth, plummeting oil prices and political turmoil in Europe put pressure on equities, too. Increased volatility sent markets spinning during the final months of the year.
In Canada, the health-care sector posted the biggest absolute decline, as cannabis stocks plunged in the weeks following marijuana legalization.
Canada’s S&P/TSX Composite Index dropped by 10.1 percent – falling to its lowest level since mid-2016 – while the S&P 500 Composite Index and the Dow Jones Industrial Average declined by 8.7 percent and 6.9 percent, respectively, in Canadian dollar terms. In a rush to safety, and perhaps in an attempt to preserve gains going into year-end, defensive market sectors gold, the U.S. dollar, and other safe-haven assets all outperformed. The stronger U.S. dollar and weaker oil prices pushed the loonie steadily lower through the quarter.
In Canada, the health-care sector posted the biggest absolute decline, as cannabis stocks plunged in the weeks following marijuana legalization. It was the energy sector, though, that weighed heaviest on index performance. The price of West Texas Intermediate crude (WTI) hit a four-year high in early October, then went into a steady slide that saw it shed over 40 percent of its value. Western Canadian Select (WCS) fell below US$15 a barrel, the lowest level since the depths of the 2015/2016 oil shock.
The industrials and consumer discretionary sectors, both economically sensitive sectors, were also hit hard by growing economic uncertainty. A rotation to defensive sectors pushed staples and communications services to gains, while higher gold prices lifted the materials sector.
Among S&P 500 sectors, staples and real estate outperformed, but declined nonetheless. Only the utilities sector managed to remain in the black. As in Canada, energy stocks posted the worst performance, with industrials, consumer discretionary and technology not far behind.
Most international markets fell alongside their North American counterparts with the MSCI World Index dropping by 8.6 percent, the MSCI Asia Pacific declining by 6 percent and the MSCI Europe falling by 7.9 percent, all in Canadian dollar terms. Emerging markets outperformed the global aggregates for the quarter, as rapidly retreating U.S. interest rates began to soften the U.S. dollar, whose strength had been a headwind for developing economies all year.
Both the U.S. Federal Reserve and the Bank of Canada raised their benchmark interest rates during the quarter, but government bond yields fell sharply as investors became increasingly concerned about the weakening economic growth outlook. Government bonds in Canada and the U.S. delivered positive returns for the quarter as interest rates retreated. However, growing credit risk caused corporate spreads to widen and corporate bonds to underperform. High-yield bonds also saw significant losses as investors fled to safer assets.