February saw the return of volatility to the market. Over a span of 10 days, the S&P 500 Index dropped 11.8% in local currency terms. While the drop was fairly typical, the pace of the slide was not. In February, Canadian and U.S. equities, as represented by the S&P/TSX Composite Index and the S&P 500 Index returned -3.02% and 0.36% (C$) respectively. On the currency front, the loonie was dragged down 4.04% against the U.S. dollar. Internationally, negative also prevailed. Over the same time period, the MSCI EAFE Index returned -0.49% (C$) and the MSCI Emerging Market Index -0.59% (C$). FTSE TMX Canada Universe Bond returned 0.15% during the month.
Inflation cools to 1.7%. Statistics Canada reported in late February that the average core inflation advanced in January to 1.7%. The average has been on a steady climb since May 2017. The movement suggests underlying consumer prices have been creeping higher along with Canada’s recent economic strength. However, the economy still faces potential headwinds from NAFTA renegotiations, U.S. tax cuts and new mortgage rules. Also in late February, the government released its “gender themed” 2018 Federal
Fed report signals no worries about volatility. The Federal Reserve said in its semi-annual report last month that it still sees equity prices as elevated despite the recent market selloff, but noted that “overall vulnerabilities in the U.S. financial system remain moderate on balance.” The market turbulence last month was triggered in part by stronger-than-expected wage growth that suggested inflation may be turning up after years of hovering below 2%. That fueled concerns the Fed might move to increase rates more quickly than previously expected. Many analysts now forecast four Fed rate increases this year due to strengthening economic momentum.