Q3 Market Summary and Outlook

Both the S&P/TSX Composite and the S&P 500 Indices advanced over the period, continuing their recovery from COVID-19-related lows in March.

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Both the S&P/TSX Composite and the S&P 500 Indices advanced over the period, continuing their recovery from COVID-19-related lows in March. Stock prices rose through July and August as economic activity continued its gradual resumption, and the spread of infections slowed. Moving into September, the rally lost steam as investors began to worry about a virus resurgence, rising U.S.-China tensions and the November U.S. presidential election. Equities were supported by record low bond yields as the Bank of Canada and U.S. Federal Reserve (the Fed) kept their benchmark interest rates near zero, and the Fed announced that its monetary policy will be more accommodative than usual until inflation rises. A stronger Canadian dollar lowered returns for Canadians from U.S. and international investments.

Materials was among the strongest sectors in the TSX due to gold companies and lumber producers, which were buoyed by higher commodity prices. The industrials sector was also especially strong. Low interest rates supported the utilities and staples sectors. Declining sectors were led by health care as several cannabis companies reported large quarterly losses. Energy shares were the weakest among the larger sectors as oil prices remained well below their pre-pandemic levels. Technology, which remains by far the top-performing sector year-to-date, struggled in the third quarter.

Energy was the only S&P 500 sector to lose ground. The consumer discretionary and technology sectors posted strong gains despite the late-period retreat of sector heavyweights like Amazon.com Inc. and Apple Inc. The materials sector was also among the top-performing groups, buoyed by strength in chemical companies, which benefitted from lower-priced petroleum feedstocks. The industrials sector was strong after industrial production and capacity utilization increased in August for the fourth consecutive month.

International equity markets were mixed. Germany was the strongest major European market, while the largest markets in the region – the U.K. and France – underperformed. U.K. equities fell as the U.K. and European Union struggled to come to terms on a post-Brexit trade relationship. Japanese stocks finished higher after initially coming under pressure when Fitch revised the country’s credit rating outlook to negative. However, investor sentiment received a boost when Warren Buffet’s Berkshire Hathaway Inc. made big investments in several large Japanese trading companies. Australia underperformed as the country recorded its first recession in thirty years. Hong Kong stocks underperformed as protests and economic sanctions in reaction to the new national security law hindered activity.

Global bond returns were mixed. Government bonds in most regions saw little change as central banks kept benchmark policy rates low. However, yield curves (the difference between long-term and short-term rates) in some countries – including Canada – finished slightly steeper than where they began, resulting in short- and mid-term government bonds slightly outperforming long-term bonds. Central banks continued providing the support programs that they initiated earlier this year to calm credit market volatility. These support programs drove outperformance of asset classes directly exposed to the programs, such as investment grade corporate and high-yield bonds.

The near-term outlook for stocks is mostly dependent on the path of COVID-19 infections and the potential for continued economic recovery versus new restrictions that slow growth. Even without new restrictions, the pace of recovery is now inevitably slowing after a quicker-than-forecast rebound in the last two quarters. Uncertainty about the U.S. presidential election and vaccine deployment timelines will continue to heighten volatility. However, powerful supports for stocks, including monetary stimulus, a booming housing market and the impact of China’s improving economy, should provide enough lift to ensure the continuation of the nascent new bull market.

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