Market Update

Market Update – Q2 2023

Q2 was a second successive strong quarter for investors as stocks continued their promising 2023 recovery and bond yields stabilized on growing economic optimism and cooling inflation.

U.S., Canadian and global equities closed the quarter and first half of 2023 in positive territory. Technology was again the leading sector, with the Nasdaq logging its best start to a year on record. Despite briefly rising in May on uncertainty over the U.S. debt ceiling and concern about the U.S. regional banking sector after the demise of another bank, First Republic, bonds yields were stable in Q2.

There were several market-friendly economic indicators. Overall, job creation in the U.S. and Canada continued to be resilient. While the creation of new jobs is welcome, the U.S. labour market trend now appears to be slowing, with wage pressures easing. The Fed will view this favourably in its ongoing battle with inflation. U.S. house prices also posted their largest annual drop in 11 years. And a survey of U.S. small and medium-sized businesses revealed hiring, sales expectations, and credit availability have, at a minimum, slowed, which are also positive indicators in the inflationary fight.

The Bank of England, European Central Bank and Reserve Bank of Australia aligned monetary policy with the Fed and raised rates twice during Q2. All three increased rates by 25 basis points in May, then in June hiked a further 50 basis points, 35 basis points and 25 basis points, respectively. The Bank of England, particularly, is grappling with inflation in the U.K., which is the highest in the G7 at 8.7%.

The broader inflationary trend in the U.S. shows prices are slowly easing. Inflation fell early in the quarter to 4.9%, its lowest level in nearly two years. However, core CPI, excluding energy and food, crept up 0.44% laterin Q2, partly led by housing costs and used car prices. The Fed also raised its target interest rate by another 25 basis points to 5-5.25% in May, the tenth raise in 15 months. Fed chair Powell then announced a “hawkish pause” in June but signalled more hikes might still be needed in the second half of 2023. The Fed’s next interest rate meeting is set for July 26.

Canadian inflation cooled through the quarter, from 5.2% to 3.4%, its lowest level since June 2021. Statistics Canada said this was largely due to lower gasoline prices, although food and housing costs remain elevated. After a four-month break, the Bank of Canada surprised by hiking rates 25 basis points to 4.75%. The decision was based on concern over excess demand in the economy, a tight labour market, and increased housing market activity.

Capital Markets in Q2

The S&P/TSX Composite Index ended the quarter up 1.1%, the S&P 500 Index up 6.3%, the MSCI EAFE Index up 0.9% and the MSCI World Index up 4.6%.

Equity markets rose through April but then dipped in May as the banking sector, falling oil prices, and the U.S. debt ceiling negotiations weighed on performance before getting back on track in June. U.S., Canadian and global stocks ended Q2 and the first half of 2023 in positive territory. Technology was again the leading sector, with the Nasdaq logging its best start to a year on record and Apple becoming the first company to reach a market cap of US$ 3 trillion. The S&P 500 also had its best first-half performance since 2021. TSX gains were slightly more modest due to its high exposure to the banking and oil sectors, but it was still significantly up from the October market low last year. Global stock gains were somewhat held back, too, by a slower-than-expected post-pandemic recovery in China.

Many big tech names released earnings that generally depicted a better picture than anticipated. Investors were comforted by these results, sparking hope the worst of big tech’s post-pandemic slump, including its recent large job cuts, might be over. U.S. chipmaker Nvidia Corp. also announced earnings that surpassed estimates by more than 50%, highlighting strong demand for its computer chip technology to power AI applications.

It was a tough quarter for the banking sector, which was rocked by the regional bank failures in the U.S. Four of Canada’s top five banks released earnings revealing profits were down compared to a year ago, though in absolute terms, performance remained resilient. In global equity markets, Japanese stocks experienced a resurgence, with local indices reaching their highest level in 33 years. This growth is primarily driven by increasing demand from foreign investors.

Despite briefly rising mid-quarter, U.S. and Canadian bond yields were overall stable in Q2. Yields were stable in April, reflecting investor optimism and cooling inflation, then rose in May on uncertainty over the U.S. debt ceiling negotiations and concern about the U.S. regional banking sector. A better-than-expected economic backdrop also impacted the outlook for interest rates, which influenced the trajectory of yields. But through June, bond yields stabilized again as Democrats and Republicans in Congress agreed to extend the U.S. debt limit until 2025, and worries over the recent bank failures subsided.

Directed by Saudi Arabia, the world’s largest oil producer, OPEC announced a cut in oil production in April, reducing it by 1.1 million barrels daily. This was in response to oil prices dropping to their lowest level since late 2021. Saudi Arabia then introduced a second production cut two months later, reducing output by one million barrels daily.

What can we expect now?

This round of rate hikes has sent a clear message: The battle against inflation is ongoing and far from over. Consumer demand for goods and services sector prices remain high, housing activity is increasing again, while wage growth is much higher than historical averages. In response, central banks are prepared to raise rates further. But going forward, we expect to hear more questions on the ability of monetary policy alone to solve more structural economic issues, such as labour and housing market imbalances.

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, as many investors do. Ongoing monitoring and reviewing of your portfolio also ensure it remains on track. Diversifying investments reduces risk as well.

We are here to help you achieve your financial goals. Should you have any questions, please do not hesitate to contact your NPW Advisor.

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