MARKetS REPORT - 2023 3rd Quarter
“The longer you can look back, the farther you can look forward.”
- Winston Churchill (speech, March 1944)
After strong back-to-back first and second quarters, the good run investors have had in 2023 temporarily came to end in Q3 as interest rates, inflation and a slowing economy reined in the market recovery.
U.S., Canadian, and global equities began Q3 confidently, climbing through July but then faded through August and September to finish in the red. Year to date, the equity markets remain in positive territory. Bond markets saw U.S. and Canadian yields rise in August after Fitch credit rating agency downgraded U.S. debt and then in September on inflation and rate announcements by both the Federal Reserve Board in the U.S. and the Bank of Canada.
The froth on the U.S. and Canadian job markets finally showed signs of ebbing in Q3. Canadian wage growth also slowed. This will be viewed positively by both the Federal Reserve and the Bank of Canada as they continue to engineer an economic slowdown and monitor job and wage growth for signs of inflation.
To bolster U.S. and Chinese trade relations, U.S. treasury secretary Janet Yellen visited China and met with government officials. In response to a slower than expected post-COVID economic recovery, China also introduced a series of stimulus measures targeting its financial markets, property and tech sectors and consumer spending. This included cutting its bank reserve requirement ratio, resulting in the release of over CNY600 billion (C$110 billion) from capital reserves to raise commercial lending capacity.
The European Central Bank hiked rates by 25 basis points twice in Q3, to 3.75% in August and 4% in September. Also in September the Bank of England left rates unchanged for the first time in two years after U.K inflation, which remains the highest in the G7, dipped slightly. The Bank of Japan made a policy tweak. It maintained its long-held 0% target for 10-year bond yields but expanded the allowed range from 0.5% to 1%. The Bank of Japan also increased its 2023 inflation forecast from 1.8% to 2.5%.
Headline inflation refers to price readings over time that includes commodities like energy (including oil and gasoline prices), food, housing, transportation, medical and electronics in its basket of goods reviewed. On the U.S. inflation front, the U.S. headline Consumer Price Index (CPI) came in at 3.7%. This was in line with expectations and largely due to energy and rent costs. The core inflation reading, which excludes the usually more volatile food and energy prices, was 4.3%.
After hiking its target interest rate by another 0.25% to 5.25-5.5% in July, the U.S. Federal Reserve Board held rates steady for the remainder of Q3. At its annual Jackson Hole summit in August, Fed chair Jerome Powell warned that the Fed would hike rates further if the economy didn’t slow enough to keep inflation declining. He then added in September that the Federal Reserve was getting closer to the end of its rate-hiking cycle but the process of getting inflation sustainably down to 2% has a long way to go.
Canadian headline inflation initially cooled to 2.8 %, back within the Bank of Canada’s 1-3% inflation range and close to its 2% target but then climbed to end Q3 at 4%. This was driven by higher gas and food prices, mortgage costs and rising rents. However, core inflation figures (those without food and energy prices)showed a continuing yet slow downward or disinflationary trend. In July, the Bank of Canada raised interest rates to 5.0%, the highest since 2001, but then held them at 5.0% for the rest of the Q3. The increase in inflation was a concern for the Bank of Canada, but it pointed to a softening labour market and a reduction in excess demand as confirmation the economy is slowing.
Capital Markets in Q3
The S&P/TSX Composite Index ended the quarter down 2.2%, the S&P 500 Index down 1.3%, the NASDAQ Index down 3.9%, the MSCI World Index down 2.6% and the MSCI EAFE Index down 2%.
U.S. Canadian and global equities begun Q3 confidently, climbing through July with the S&P 500 Index in particular notching its fifth straight month of gains. Most sectors contributed positively, including banks and technology sectors. Equity markets then faded in August and September (were all those investors on vacation or paying off their VISA bills??) to finish Q3 in the red. Rising bond yields, worries about a U.S. government shutdown in October and the outlook for interest rates and inflation weighed on North American equities. China’s slow economic recovery and the continuation of a long struggle in the Ukraine-Russisa conflict also placed more pressure on global stocks. However, year to date, the vast majority of equity markets, and certainly those in the developed world, remain in positive territory.
NASDAQ-listed Nvidia Corp. had another round of results that breezed past expectations, highlighting the sustained demand for its computer chip technology which is used to power artificial intelligence (or AI) applications. During August, over 90% of S&P 500 companies completed reporting their Q2 earnings. The results broadly surprised to the upside relative to analyst’s subdued expectations, but earnings growth was mixed. It was also fiscal Q3 reporting season for Canada’s major banks. Profits at the banks were down as a result of rising expenses and money put aside for credit losses, but in absolute terms performance remained resilient. There is reason to be nervous about small regional US and global banks, but our banking system (and certainly our top-6 Canadian Tier 1 banks) remain the envy of the world.
Bond markets, which tend to move in the opposite direction to equities, saw U.S. and Canadian yields rise through the quarter. Yields were stable at the start of Q3 as a result of welcoming inflation news before jumping during the summer after Fitch, a top 3 credit rating agency, downgraded U.S. debt. Yields then temporarily fell back as positive employment data came in, but went north again in September as investors interpreted the context of the U.S. Federal Reserve and the Bank of Canada putting interest rate hikes on hold to mean rates would likely remain higher for longer.
After dropping in Q1 and Q2, oil prices rose in Q3 surpassing US$90 per barrel of WTI for the first time since the end of 2022. This surge was mainly due to production cuts by Saudi Arabia and OPEC having an impact on global supplies. Saudi Arabia’s supply is currently 25% below its official production capacity which should act as a buffer if demand increases.
In currency markets, the U.S. dollar rallied through Q3 on relative U.S. economic strength and elevated bond yields. The loonie, dubbed a “petro dollar”, also increased in value against other major currencies. Gold finished the 3rd quarter of 2023 at US$1,848.63 per oz.
What we can expect now?
After showing strength in the first half of 2023, markets have stumbled in the last two months. However, with inflation moderating, we are certainly getting close to the end of the central bank’s rate-hiking cycle. And just like in the past, transition periods often come with volatility. Investors and analysts will be looking for more visibility on the delayed impact of interest rate hikes, how long rates may stay high and what it will take for central banks to begin reversing course. And even though the economy may be slowing, there is still a measured real gross domestic product growth. So, by the typical terms that economists would label a recession as 2 consecutive quarters of GDP decrease, then we aren’t in a recession.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.
A reminder of our new Wealth Access portal
There is a new online access to your accounts, a new Wealth Access portal (as of this summer). You should have received an email asking you to click on a personalized link to the new portal and to set up a new password. The new portal webpage is at https://mandeville.investor.d1g1t.com/
If Wealth Access portal does not go to the above link, please contact our office, we will need to reset your access.
Thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals. We are with you every step of your investment journey.
Should you have any questions regarding your portfolio, or wish to set up a meeting either in person, by phone or online by Zoom, please do not hesitate to contact my office at 519-432-6744. My assistant Susan can be reached at extension 239 and I can be reached at extension 238.
Until we speak again, I hope you have a wonderful autumn!
All the best,
Mark McConnell, BA (Econ.) DipBIS
Senior Investment Advisor, Branch Manager
Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.
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The information in this letter is derived from various sources, including CI Global Asset Management, Bank of Canada, Federal Reserve, Statistics Canada, U.S. Bureau of Labor Statistics, Bloomberg, Globe and Mail, Advisor.ca, Reuters, Wall Street Journal, LinkedIn News, Daily Mail, CNN, FX Street, CNBC, National Post, Investment Executive, Marketwatch, Barron’s, Fortune, Toronto Sun, Investing.com, Canadian Press, Trading Economics, and Yahoo Finance. All index performance is in Canadian dollars. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.