Unstoppable equity market rally on soft landing narrative
Resilient economic data throughout the first quarter supported the soft landing narrative and pushed equity markets around the world to new record highs. Global equities posted strong returns with the MSCI ACWI Index up 11.0% during the first quarter. In Canada, the TSX gained 6.6% and in the U.S., the S&P 500 rose 10.6%, driven once again by several of the mega-cap names which posted strong earnings growth. However, the best performing market of the quarter was Japan, up 13.9% for the quarter in Canadian dollar terms.
Many European indices reached new all-time highs in March. While they lagged the U.S. and Japan for the quarter. Europe was the top performing region in March. Investors are looking to mitigate the concentration risks in the U.S. market, while turning to Europe for its cheaper valuation and re-acceleration of earnings.
While equity investors welcomed strong economic data, it was a more challenging period for fixed income investors. Stickier inflation and resilience in economic activity have shifted market expectations of rate cuts and push yields higher. The FTSE Canadian Universe Bond Index was 1.2% lower and Global Aggregate Bond index fell -0.1% for the quarter.
The NEI perspective
Labour market conditions are showing signs of cooling as the expansion of the labour force outpaces job creation. In the U.S., the number of job openings still exceeds the available labour supply, whereas in Canada, a rapid expansion of the labour force combined with slowing employment growth has resulted in an increase in unemployment.
The latest inflation numbers in Canada came in lower than expected, supporting the possibility of the Bank of Canada reducing interest rates soon. Many predicting this easing cycle could begin in June amid a weakening economy and cooling labour market.
60/40 portfolios have traditionally been effective in taking advantage of the stock and bond correlation which has mostly been negative since the turn of the century. However, the dramatic rise in inflation and interest rates in the past couple of years has created a more difficult environment for returns.