Global equities moved solidly higher in the quarter. U.S. indices climbed to record highs, while the S&P/TSX Composite Index returned to positive year-to-date territory for the first time since February. Stocks retreated in September as virus cases climbed. However, a wave of hopeful news about vaccine progress launched a near-relentless advance through the remainder of the year. Stocks received a final boost late in December when the U.S. Congress passed stimulus legislation and the U.K. and European Union agreed to an historic trade deal that averted the threat of an acrimonious breakup. Equity valuations were also supported by low bond yields as the Federal Reserve (the Fed) and the Bank of Canada (BoC) kept their benchmark interest rates near zero. However, the Canadian dollar climbed to its highest value versus the U.S. dollar in two and a half years, lowering U.S. and international returns for Canadian investors by almost 5%.
Every sector of the S&P 500 advanced. The energy sector led the gains, as renewed confidence boosted the price of oil 18%. The financials sector climbed as yield curves steepened — an environment typically positive for bank profitability. Defensive, interest rate-sensitive utilities, real estate and staples were among the underperforming sectors, due to rising bond yields. Information technology and consumer discretionary sectors underperformed as large-capitalization tech and Internet companies lost momentum in the mid-quarter shift to value-stock outperformance. In the TSX, the health care, discretionary, financials and energy sectors led the gains. The health care sector soared 30%, as cannabis companies reacted to the win by Democrats in the U.S. presidential election. The financials sector did the heavy lifting for the index, as it climbed in response to higher interest rates and rising economic optimism. Materials was among the declining sectors as gold prices retreated. The utilities and staples sectors also underperformed.
Asian markets mostly outperformed, in part because of improving economic data in China. Asian equities received a further boost after many countries in the region signed the world’s largest free-trade agreement. European equities lagged in the global rally as Europe appeared to be headed for a double-dip recession because of its renewed lockdowns. U.K. equities were buffeted by the waxing and waning of prospects for an agreement with the European Union regarding their post-Brexit relationship.
Fixed-income markets delivered mostly positive results. Canadian government bonds finished the period with a slight gain. However, U.S. government bonds lost ground as vaccine news boosted optimism and pushed yields on 10- and 30-year bonds to their highest level since March in the U.S. and since April in Canada. Corporate bonds were solidly higher in both countries, as the more positive outlook compressed corporate spreads. With short-term rates anchored, the rise in long-term rates steepened yield curves and caused long-term bonds, which are more sensitive to interest-rate changes, to underperform short-term bonds. Global government bonds generally outperformed U.S. bonds as long-term yields fell in many major markets and boosted bond prices.
The year ahead is shaping up to perhaps be an extraordinary year for investors, as a uniquely bullish environment takes form. Driven by the promise of successful vaccines, the global economy looks set to experience a broad, synchronized recovery. Activity will be boosted by pent-up demand. Corporate earnings, already back to pre-COVID levels in many countries, will push to new highs. Economies will feel the lagged impact of massive monetary stimulus and, in many cases, additional fiscal stimulus. Higher demand will lift prices of commodities tied to growth (e.g., oil, copper) and weaken the U.S. dollar — a outlook especially favourable to the Canadian equity market. There are risks of speedbumps along the way — such as a surprise delay in vaccine deployment — but 2020’s unprecedented global economic shutdown has set the stage for what may be an unprecedented recovery.