Thus far, 2018 has been a bumpy ride for investors as volatility has returned in full force unlike the year prior. While there was plenty of positive fundamental news, much of it was undone by trade spats, presidential tweets and investor sentiment. In the first quarter, Canadian and U.S. equities, as represented by the S&P/TSX Composite Index and the S&P 500 Index, returned -4.52% and 1.99% (C$) respectively. International equities, as represented by the MSCI EAFE Index, returned 1.32% (C$) while emerging markets, as represented by the MSCI Emerging Markets Index, was up 4.28% (C$). On the currency front, the Canadian dollar dropped -2.51% against the U.S. dollar, accounting for much of the rise in foreign indices priced in Canadian dollars.
Canada’s economy disappoints. Canada’s economic output unexpectedly contracted in January as the impact of tougher real estate regulations and oil sands shutdowns further applied the brakes to an already sluggish economy. Statistics Canada reported that real GDP declined 0.1% in January from December on a seasonally adjusted basis. The economy’s January slump strengthened the case for the Bank of Canada to hold off on further interest-rate increases for the time being. In January, the central bank projected first-quarter GDP growth at 2.5% annualized, a forecast that now looks optimistic.
Fed lifts rates, signals a quickening pace. The U.S. Federal Reserve (Fed) raised interest rates last month and forecasted at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the U.S. economy and inflation and spur more aggressive future tightening. In its first policy meeting under new chief Jerome Powell, the Fed indicated that inflation should finally move higher after years below its 2% target and that the economy had recently gained momentum.