The S&P 500® Index gained 3.85%* for the third quarter (in Canadian dollar terms, the return for the third quarter was 4.71%), bringing its year-to-date return to 7.84%*. The month of July delivered most of the market’s return for the quarter with an advance of 3.69%* followed by returns of 0.14%* and 0.02%* for August and September, respectively.
Global equities, as represented by the MSCI World Index, returned 6.09% in Canadian dollar terms in Q3. The sharp sell off in stocks following Britain’s unexpected vote to leave the European Union on June 23rd proved to be short lived as equities started to recover in early July. U.S. large capitalization equities, as represented by the S&P 500 Index, would go on to hit successive new highs throughout the summer, before ultimately establishing a new all-time closing high of 2190 on August 15th.
The third quarter presented a continuation of prevailing U.S. economic themes, both concerning and reassuring to investors. The overlay of these factors prompted sporadic market movements, pushing U.S. stock indexes to reach new highs intra-quarter only to retreat later in the period.
The third quarter saw a drop in the heightened levels of market volatility experienced in the first six months of the year. Movements in developed market government bond yields were mixed: yields fell in the UK after the Bank of England introduced new stimulus measures in the aftermath of the Brexit vote, rose in the US on rising expectations of Federal Reserve rate hikes and were largely unchanged in other markets (with the exception of longer maturity Japanese yields). Improving investor risk appetite led to a rise in equity prices – in both developed and emerging markets – and tightening of credit spreads.
The third quarter of 2016 saw North American capital markets post robust returns across asset class, market capitalization, and sectors (Exhibit 1 & 2). From a top down perspective, markets were driven by strong economic data on both sides of the border, including healthy housing and labour market gains, as well as improving energy market fundamentals. With this economic backdrop in place, both US and Canadian government yield curves moved up marginally while corporate credit spreads compressed materially, leading to positive performance for fixed income markets during the quarter. On the equity side, economically sensitive sectors such as Industrials, Energy, Financials, and Consumer Discretionary delivered large gains, while defensive sectors such as Real Estate, Utilities and Materials (precious metals) took a breather from their stellar performance in the second quarter. In summary, the North American capital markets continued their upward trajectory, with “growth” levered investments outperforming “safety”, from a thematic point of view.
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