Last quarter we asked “How long can the party last” and we may be now starting to see the partygoers slowly begin to leave. Talk from central banks about raising interest rates and the gradual end to their massive bond buying programs weakened both bond and equity markets towards the end of this past quarter. We are the first to admit that we don’t know how long this bull market will last as we don’t attempt to predict when the top may occur. This could end up being a small bump in the road to higher highs. Whatever may lie ahead, our clients can rest assured their portfolios are engineered to weather bumps, twists and turns along the way.
Canada – The Canadian equity market broke its upward trend and fell in the second quarter; the broad market fell -1.6% while small cap and value were hit harder, falling -5.5% and -3.4%, respectively. Large caps also fell by -1.8% and only growth stocks were ahead by 3.0% this past quarter.
United States – The rally in US stocks ran out of steam and the market was barely positive, advancing just 0.3% for the quarter. Small cap and value were the weakest, falling -0.7% and -1.4%, respectively. Large caps advanced 0.5%, while the strongest performance was growth which was up 1.9%.
International & Emerging Markets – International and emerging markets were the strongest performers again this quarter, although somewhat more subdued than in Q1. International was up 3.6% (compared to 6.8% in Q1) and emerging markets also gained 3.6% (compared to 10.9% previously). International small caps were the big winner, gaining 5.5%, following by growth at 4.9%, large caps at 3.3% and finally value at 2.3%.
Fixed Income – Recent comments from central banks around the world – the European Central Bank, the Fed, the Bank of England and the Bank of Canada – have signaled that the end of low interest rates may be near. The Fed has raised rates twice this year and the Bank of Canada raised rates on July 12, the first time in seven years. As a result, bond yields have started to increase around the world at the end of June, with the weakness spilling over into stocks, pushing global markets lower at quarter end. Our alternative fixed income funds continued to march along with quarterly returns in-line with expectations.
Politics and the Markets
The world has now experienced over 160 days of the Trump Presidency and some may be wondering “to what extent do politics affect the stock markets”? While markets don’t ignore politics, the real drivers are company profits, valuations and economic data.
For interest sake, let’s look back at two historical events that occurred over the past 45 years as we may be heading towards a third – impeachment. Why impeachment? There is enough smoke coming from the investigation into links between the Trump campaign and the Russian government to make an eventual impeachment a possibility.
There have been two impeachments in modern times: Nixon in 1974 (he resigned before he could actually be impeached) and Clinton in 1999 (he was impeached by the House of Representatives but acquitted by the Senate). Both cases are also interesting as Nixon occurred during a severe bear market, while Clinton occurred during the start of a two year bull market.
Looking at the daily price movement of the S&P 500 for the three notable dates during the Watergate Scandal, no single day return jumps out as being significant when taken in context to the economic events occurring during the same time period – the redefining of the global monetary system, a plummeting US dollar, and an oil embargo with skyrocketing gas prices (and shortages). From February 6 to August 9, 1974 the S&P 500 fell -13.3% while during the entire bear market it fell -41.7%. A drop of -1.8% on July 30 seems to pale in comparison.
Clinton’s impeachment, on the other hand, occurred during the start of a bull market where the S&P 500 had a cumulative return of 58.5%. During the period from October 8, 1998 to February 12, 1999, the S&P 500 rose 28.2%. While the drop of -1.9% on February 12 may suggest the market didn’t like the acquittal, it appears the market had its sights on other news given the strong performance during this whole period.
Will history repeat itself if there is another impeachment? It’s hard to say. As pointed out above, the markets seemed to shrug off the political events even during the seriousness of Watergate, however, given the unprecedented allegations of potentially colluding with the enemy to win a Presidential campaign, there is the possibility for much greater volatility if they are proven.
The Russian investigation isn’t the only risk coming out of the Trump administration. Health care reform failure is a real possibility which would likely derail the much anticipated changes to corporate taxes. Expectations for tax reform that are built into current valuations would be a negative for the market. These two failures would call into question whether Trump could actually accomplish anything he promised during the campaign.
An increase in future overall market volatility is widely expected, but it’s necessary to filter out what is noise (reactions to the most recent political events) versus those that are tied to economic data, company profits and valuations – these will have a much greater and longer term impact on markets.