MARKET COMMENTARY

Markets Counter Political Turmoil

Midway through 2017, International equity markets are proving resilient in the face of political turbulence.

07.25.2017 - Ian Riach, Chief Investment Officer

Markets Counter Political Turmoil

We are midway through 2017 and equity markets, particularly outside of Canada, are proving resilient in the face of political turbulence on many fronts. In the United States, a number of missteps (and “mis-tweets”) by President Trump have prevented, or at least distracted, Congress from acting on the new administration’s policy agenda. Similarly, Great Britain’s ill-timed election and the upcoming vote in Italy have elevated policy uncertainty in Europe. The Asia region also remains on alert, given North Korea’s recent, alarming actions. Despite all of this, the S&P 500 Index has gained approximately 5.9% CDN$ so far this year.1 The return in the Europe, Australasia and Far East (EAFE) area has been more impressive, with the MSCI EAFE Index rising 13.3% CDN$.2

Such strong performance may seem counterintuitive given the political turmoil. However, for financial markets the economy and corporate profits tend to be more important than politics. On these fronts, the news is more encouraging. After a sluggish first quarter, the US economy looks poised to grow at better than a real (or inflation-adjusted) 2.0% rate for the full year.3 This pace is still below the long-term growth trend but, when combined with low interest rates and low inflation, is supportive of continued expansion. Corporate profits have benefited in this environment as revenue growth, albeit moderate, has yet to be offset by rising input costs—in particular, wages despite strong labour market growth. Thus, profit margins remain high and this has been generally reflected in share prices

The story is similar in the EAFE area, which is benefiting from accelerating economic growth and very accommodative monetary policy.

After leading all markets in 2016, the Canadian equity market has not performed as well year to date. Thus far in 2017, the most influential sectors in the S&P/TSX Index (Energy, Financial Services and Materials) are flat to down. These three sectors comprise approximately 65% of the market capitalization of the Index4, so their performance significantly affects overall market return.

Bonds with maturities beyond two years have rallied in 2017, as mid- to longer-term growth expectations have remained low. We have seen short-term market rates rise in anticipation of further increases in the US Federal Reserve’s administered rates, and as the probability of a rate cut by the Bank of Canada diminished. However, short-term rates remain very accommodative in the face of below-trend economic growth.

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1. As of June 20, 2017, Bloomberg, https://www.bloomberg.com.
2. As of June 20, 2017, Bloomberg.
3. 2.2% forecast by The Conference Board, “The Conference Board Economic Forecast for the U.S. Economy,”
The Conference Board, https://www.conference-board.com.
4. As of June 20, 2017, Bloomberg.

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