The months go by and not much seems to change for the global economy. Despite geopolitical factors that remain worrisome, the world economy continued to expand. This good rate of economic growth, combined with encouraging data and the announcement of strong corporate earnings, helped maintain the uptrend on global stock markets.
While economic conditions still appear favourable for stocks, we must beware of their high valuations, particularly in the United States. In addition, investor complacency is at record levels and volatility is low, which could hide some pitfalls.
Market situation at October 31, 2017
- The benchmark index of the Canadian stock market, the S&P/TSX, rose 2.7% in October, topping the 16,000-point mark for the first time in its history. Most sectors participated in this rally, which brought the index’s year-to-date total return to 7.3%.
- In the U.S., equity markets jumped 5.7% for the month, despite the negative effects of hurricanes Harvey and Irma. Excellent technology company results supported the advance of U.S. indexes.
- International stock markets also performed well. European equity markets gained 3.7%, while the markets of Japan and emerging economies were up 10.7% and 6.9%, respectively.
- With the exception of the United States, most countries saw their interest rates decline, while credit spreads remained stable.
- The drop in interest rates pushed up the prices of bonds, which posted positive returns for the month.
Currencies and commodities
- The Canadian dollar fell 3.3% against the U.S. dollar, from US$0.802 to US$0.776. This situation boosted the value of U.S. stocks held in the portfolio.
- The price of a barrel of oil climbed, ending the month above $60, a level not seen in more than two and a half years.
- Commodity prices rose during the month. Nickel led the way with a gain of 17%, driven by expected strong demand for electric vehicles. Copper prices were up 6%, while aluminum prices saw an increase of 3%.
- The appointment of Jerome Powell to the position of chair of the U.S. Federal Reserve was confirmed. Since the new chair shares the vision of Janet Yellen―whom he will replace in February 2018―, the markets shrugged off this news. The Fed is expected to hike the U.S. benchmark rate in December.
- The Trump administration unveiled the broad lines of the biggest tax reform project in the United States in more than 30 years. Stock markets reacted positively to the proposed tax reduction plan for businesses and individuals, but they could pull back if the passing of these measures is delayed.
- After two consecutive increases in its policy rate in July and September, the Bank of Canada decided to keep the rate at 1.00% in October. In explaining this decision, BoC Governor Stephen Poloz said that caution is still in order, even though the Canadian economy is doing well.
- The European Central Bank confirmed that it would slow its quantitative easing program, while extending it to September 2018. ECB President Mario Draghi also announced that he did not expect an increase in the benchmark rate for quite some time.
Some risks to watch closely
Voici certains risques que nous suivrons de près d’ici la fin de 2017.
- Investors remain very bullish about the stock markets, but the fact that they haven’t suffered a decline of more than 5% in almost two years should raise some concerns.
- A tax reduction in the U.S. when the economy is already expanding could create more inflation than expected and force the Federal Reserve to quickly raise its benchmark rate, which would have a negative impact on stock market valuations.
- Political tensions between the United States and North Korea are still making the headlines and the possibility of a settlement seems increasingly remote.
- Protectionism is still prominent in President Trump’s trade discourse, which could have negative repercussions on the Canadian economy and many others.
A glance at our portfolio returns
Thanks to the excellent performance of international equities, the monthly return of the balanced portfolios jumped by as much as 2% or 3% in October, depending on their target equity weighting. Year to date, these portfolios have had very satisfactory results. Note that bonds also posted positive returns for the month.
The pace at which the Fed tightens its monetary policy will be decisive for the positioning of our portfolios. For now, we are slightly overweight in equities in our Private Portfolio Management and Private Securities Management approaches, for the following reasons:
- Favourable conditions for stocks and the low risk of inflation
- Sustained corporate earnings and revenue growth
- Attractive dividend yields compared with bond yields.
However, relatively high stock valuations and the fact that investor confidence is at a 30-year high prompt us to remain vigilant about the equity markets.
François Landry, CFA Senior Vice-President and Chief Investment Officer
The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.