The volatility that was so prevalent in February and March continued through most of April, again taking investors on a bit of a wild ride. Geopolitical headlines continued to dominate the news, with the prospect of a trade war between the U.S. and China, as well as rising tensions between the U.S. and Russia over Syria dominating the news flow.
Despite the volatility, equities were mostly positive in the month. The S&P/TSX Composite gained 1.8% on the back of a surge in energy stocks. The S&P/TSX Energy Index gained more than 12% as oil rose sharply. U.S. stocks were modestly higher, as the S&P 500 gained 0.4% in U.S. dollar terms, and the MSCI EAFE Index rose by nearly 2.4%.
With oil rising and geopolitical tensions high, the U.S. dollar strengthened, eroding those gains for unhedged exposure. In Canadian dollar terms, the S&P 500 was lower by 0.2%, and the MSCI EAFE gained 1.8%.
With bonds, yields moved higher both here and in the U.S as investors were concerned that strong economic growth trends and rising inflation would cause the U.S. Federal Reserve and the Bank of Canada to hike rates more quickly than anticipated. In the U.S., the yield on the benchmark U.S. 10-year Treasury bond briefly crossed the 3% threshold for the first time since early 2014. It ended the month at 2.95%, 21 basis points higher. In Canada, there was also upward pressure on yields, with the 10-Year Government of Canada seeing its yield jump 21 basis points to end April at 2.30%
This bump in yields saw bond prices fall with the FTSE/TMX Canada Bond Universe fall by 0.85% in the month, with most of the damage occurring at the long end of the curve. Corporate bonds, with their higher yields and lower sensitivity to interest rates outperformed governments, falling around 0.5%, compared with a 1% fall in governments.
Looking ahead, global economic growth continues to be strong and is expected to remain positive for the rest of the year. In the U.S. particularly, corporate earnings growth is likely to be above trend, thanks to the Trump tax cuts, which will help boost consumer and business spending, and job growth
The key risks are higher than expected inflation which will cause yields to rise higher than anticipated, pushing down bonds, and creating a headwind for equities. Another risk would be the geopolitical environment caused by the unpredictability of Mr. Trump.
In this environment, each of the portfolios finished the month higher, with the bond funds ending lower, while the equity funds, except for the Fidelity Small Cap America Fund were higher.
Despite trailing their respective benchmarks in the month, the portfolios have been performing as expected from a risk perspective through the recent uptick in volatility. Over the past three months, the portfolios have largely outperformed, and done so with much less fluctuation.
Moving ahead, I expect volatility to remain higher than it has been in the past couple of years, but barring something out of left field, I expect volatile, but modestly rangebound markets. That should allow the portfolios to perform better relative to their benchmarks and make back some of the recent underperformance. I continue to monitor the portfolios closely.
For a detailed review of the portfolios’ performance and risk reward metrics, you can download our standard monthly portfolio report here. Additional detail can be found in these reports generated by Morningstar. A summary report can be downloaded here, while the more detailed report can be downloaded here.