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October 22, 2021

Third quarter of 2021

Hello everyone, 

The last quarter consisted of two phases. July and August were favourable months, with very little market fluctuation, but September ended the quarter on a volatile note. 

Several events shook investor confidence, including the US debt ceiling saga, the fear of rising inflation in the coming months (caused by a supply and demand shock), uncertainty about the monetary policies of the various central banks and the crisis involving the potential default of Chinese real estate developer Evergrande. Not to mention that we're still in a pandemic and that the Delta variant is negatively affecting potential economic growth for the quarters ahead. Despite all of this news, we're still optimistic about how the stock market will perform over the next 12 to 18 months, mainly buoyed by strong economic fundamentals and solid corporate profits. 

CANADA 

The S&P/TSX index, representing the Canadian equity market, ended the last three months in negative territory (-2.21%). However, the energy sector performed particularly well (+8.80%), driven by the spike in the price of oil. The reluctance of producers to increase production, combined with very high demand in the last quarter, pushed the price of a barrel to +/-$75* as of September 30. What's more, the Canadian market performed exceptionally well in the manufacturing sector, and sound employment figures surpassed investor expectations. 

As for monetary policy, it will come as no surprise if the Bank of Canada beats the Federal Reserve in raising its key rate. The economic recovery is robust at this stage and growth potential remains favourable for the coming months. Further to this trend, the loonie gained against the US dollar, with the CAD/USD exchange rate ending the quarter at 0.7880 (USD/CAD at 1.2679).* 

A note on Canada's election: While the result didn't surprise us and no drastic changes were recorded, the stock market remained stable on the news. What tax changes will the Liberals make for the coming years? We'll find out in the next few months ...

*Source: Market-Q 

UNITED STATES 

With a 4.65% dip in September, the flagship US equity index, the S&P 500, saw its 7^th consecutive month of positive returns come to an end. Nevertheless, the index ended in positive territory for the quarter with a gain of +0.58%. This is the biggest monthly reduction since March 2020. The market decline can be attributed to a number of issues, including the US government’s debt ceiling, the rise in inflation, and the Delta variant, which negatively affected opportunities for economic growth. In addition, Federal Reserve President Powell hinted that monetary policy is about to become tighter. How will they go about it? There's every reason to believe that they'll slash their bond purchases (tapering), which will reduce the injection of cash into the market. A key rate hike is not to be expected until about the second half of 2022. On the other hand, bond yields have increased, causing negative returns on fixed income and a steeper drop in the technology and socially responsible equities sector. 

We'll see if Biden gets the support needed to go ahead with his infrastructure plan, which could be good for employment and business revenues.

INTERNATIONAL AND EMERGING MARKETS 

The European and Asian markets have experienced a fair amount of volatility in recent weeks. In Europe, investors fear weak economic growth, coupled with high inflation, which is not a precursor for return on equity. However, it's still too early to talk about stagflation. European equities are trading at good price/earning ratios at the moment and opportunities can be found. 

Emerging markets have especially been affected by the crisis involving Chinese real estate developer Evergrande, a company at risk of default. Investors fear a complete lack of government assistance, which signals caution in the market. Repercussions may be felt in North America, but the situation is totally different. China's communist regime acts differently (and effectively) than our governments in such situations. 

Besides, China has increased the regulation of tech firms, which has also adversely impacted that market. It's happened many times in the past, but it didn't prevent those companies from prospering. It's always riskier to invest in that area of the world given the political uncertainty, but we think it's essential to have part of our portfolio there, again with the aim of optimizing our return and diversification. 

CONCLUSION 

In short, the major central banks' accommodative monetary policies are starting to be scaled back, so it's normal to see some volatility as market conditions change. The pace of growth will likely be slower, but that's understandable because we've just had a record year of performance. Overall, the outlook remains positive, thanks to the strong economic fundamentals and corporate profits. 

Regardless of our position in the market cycle, it's important to take a disciplined investment approach and stay focused on your long-term financial goals. We recommend keeping a diversified mix of asset classes in your portfolio to maximize potential returns and minimize risks. Regularly reviewing and rebalancing your portfolio will also help you stay on track. 

We'd like to end this summary with an interesting article published in La Presse on October 3 (French only).

To read the article