U.S. stocks set new all-time highs in July, lifted by a temporary trade truce, an increasingly accommodative U.S. Federal Reserve (the Fed), and by stronger than expected earnings reports. August saw a drawdown as concerns grew about global growth prospects. Amid rising recession fears, yields declined, yield curves flattened, and some key curves inverted. Stocks rebounded in September in response to an easing of trade tensions, and the Fed lowering interest rates for the second time in the period. The sharp rally in September lifted the TSX to new all-time highs.
The utilities, real estate, and staples sectors were top performers in Canada, drawing strength from the decline in bond yields which made higher dividend-paying sectors more attractive. The financials sector, which was hurt in August’s recession scare and plunge in bond yields, rallied with a September bounce in yields to close higher. Similarly, a late period rally in crude prices after attacks on Saudi oil fields allowed the energy sector in Canada to finish with a small gain. The industrials and health care sectors posted losses. The utilities and real estate sectors were top performers in the S&P 500 also. Energy was the worst performing sector in the U.S., even after the September rally mitigated losses. Health care underperformed as political campaigning continued. U.S. health companies face challenges from both Democrat and Republican proposals in the 2020 presidential election campaign.
Stocks in Europe were mixed, as the region faced weaker economic performance, particularly in Germany. Regional sentiment also struggled with political turmoil in Italy and the rising risk of an economically-shocking no-deal Brexit. A stronger U.S. dollar strained most Asian markets, as did slower growth in China, which posed a challenge especially for Hong Kong and export-dependent Japan. Economic activity in Hong Kong was also hurt by on-going protests. Japanese equities finished higher after the Bank of Japan (BoJ) announced an official easing bias.
Bond prices climbed in all regions as yields dropped. Before September’s partial recovery, yields on 30-year government bonds hit all-time lows in both the U.S. and Canada. Yields in Europe and Japan, already negative, fell further. Most central banks became more accommodative. The European Central Bank (ECB) and others joined the Fed in cutting rates, while the BoJ adopted an easing bias. But despite the global easing trend, the Bank of Canada kept its key rate steady, backed by improving domestic economic data. In September, the actions of many central banks and de-escalating trade tensions diminished recession fears, sparking a rapid unwinding of part of the August yield collapse. The bounce steepened most curves and un-inverted some of the previously inverted ones. Bonds in Canada and Japan, whose central banks kept rates steady rather than cutting them, underperformed those in the U.S. and Europe. Long-term bonds - which are more sensitive to falling rates - outperformed shorter-term bonds.
As the quarter came to an end, news of a formal impeachment inquiry in the U.S. began to weigh on equities. History suggests any potential impeachment proceedings probably won’t change existing market trends, but the political turmoil could get in the way of other pressing business, such as the congressional ratification of the United States-Mexico-Canada Agreement (USMCA), and the completion of a trade deal with China. In the meantime, economic data in the U.S. appears to now be clearly improving, lowering the risk of a near-term recession. European data still points toward a deepening slowdown, but China’s economy is starting to show signs of responding to massive stimulus, and a stronger China will help lift global growth, especially in trade-dependent economies like Germany. The global central bank easing cycle will also provide support for equities in the quarters ahead.