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. YTD 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 Fed and 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 Fed and 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, 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%.

U.S. headline 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 food and energy, was 4.3%. After hiking its target rate by another 0.25% to 5.25-5.5% in July, the Fed held rates steady for the remainder of Q3. At its annual Jackson Hole summit in August, Fed chair Powell warned the Fed would hike rates further if the economy didn’t slow enough to keep inflation declining. He then added in September that the Fed 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 inflation initially cooled to 2.8 %, back within the Bank of Canada’s 1-3% range and close to its 2% target but then climbed to end Q3 at 4%. This was driven by higher gas prices, food prices, mortgage costs and rising rents. However, core inflation figures showed a continuing yet slow disinflationary trend. In July, the Bank of Canada raised interest rates to 5%, the highest since 2001, but then held them 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 including banks and tech. Equity markets then faded in August and September 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 placed more pressure on global stocks. However, YTD equity markets remain in positive territory, such as Nasdaq which is still up nearly 27%.

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 AI applications. During August, over 90% of S&P 500 companies completed reporting their Q2 earnings. Results broadly surprised to the upside relative to subdued expectations, but earnings growth was mixed. It was also fiscal Q3 reporting season for Canada’s major banks. Profits were down as a result of rising expenses and money put aside for credit losses, but in absolute terms performance remained resilient.

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 Fed and Bank of Canada putting 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 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”, was also up against other major currencies.

What we can expect now?

After showing strength in the first half of 2023, markets have stumbled the last few months. Whether we are already there or not, we are getting close to the end of the rate-hiking cycle. Transition periods often come with volatility. Investors will be looking for more visibility on the delayed impact of hikes so far, how long rates may stay high and what it will take for central banks to begin reversing course.

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.

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, please do not hesitate to contact our office.

Have a great weekend,

Tracey and Paige

Note:

All index performance is in Canadian dollars.

Sources: 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. 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.

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