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AFS Insights

Investment Commentary

Third Quarter Update

Thank you for choosing Arbutus Financial as your financial advisory firm. We appreciate your trust and the business that comes with it. We hope you and your family are enjoying a great start to the Fall season.

Challenges in the Quarter
This past three months exemplifies what you as an investor should consider regarding your portfolio. We’ve seen tensions increase in the Korean peninsula and the Middle East and ongoing drama from the United States. You’d be forgiven if you thought the increased drama had negatively affected global equity markets. Equity markets can move up or down each day for many reasons but over the long term, market valuations tend to return to their fundamentals—and the fundamentals during the past three quarters have justified markets moving higher.

Oil prices advanced throughout the quarter by nearly twelve per cent to US$51.70 per barrel. A strong economy and a rebound in commodity prices helped S&P/TSX Composite earnings grow at nearly 32 per cent. Nine of ten sectors saw positive earnings growth in the third quarter, which helped the S&P/TSX Composite Index gain 2.9 per cent. The U.S. is expected to produce 10 million barrels of oil a day by next year, which will offset recent increases in global oil demand. As a result, oil will likely average in the high US$40 range for the rest of the year.

The United States
U.S. corporations are reporting better year-over-year sales and earnings results. Employment continues to improve with a falling unemployment rate, recently at 4.4 per cent as of the end of August. This implies expectations for wage growth in the second half of 2017. Higher wage growth coupled with low gasoline prices means U.S. consumption is in a strong fundamental position. Since U.S. consumption accounts for three quarters of U.S. economic output, the U.S. economy is on the right track. As a result, prospects for equities should be good for the rest of the year. The benchmark S&P 500 Index gained 4.0 per cent in the second quarter, in U.S. dollar terms, or slightly negative at -0.1 per cent in Canadian dollar terms, reflecting improved company results.

In overseas markets, international equities rose 0.7 per cent in Canadian dollar terms as measured by the MSCI EAFE Index. Brexit considerations aside, the European economic outlook has improved. Asia is showing improvement in its regional economies and stock markets—suggesting the growth we see is truly global in nature.

Central Bank Policy
In the second quarter, the U.S. Federal Reserve did not tighten interest rates after raising them twice by increments of 0.25 per cent to 1.25 percent in 2017. However, they announced they will begin to reduce the $4.5 trillion balance sheet starting in October. The U.S. Federal Reserve is expected to continue to raise its benchmark rate another time by the end of the year.

The Bank of Canada began tightening its interest rate policy to 1.0 per cent by announcing two rate increases of 25 basis points each in July and September. As a result, the Canadian dollar rallied nearly four per cent versus the U.S. dollar. It’s expected rates will increase very gradually going forward. The recent increases were significant changes considering Canada hasn’t seen a rate increase since September 2010.

Looking Forward
We continue to believe the U.S., Canadian, and international economic environment will improve over what it was a year ago but it bears repeating that a positive economic environment doesn’t necessarily mean better returns. While we may be confident equity markets will deliver another year of positive returns, market volatility is likely to remain through the rest of 2017, driven mainly by headline news and politics.

The Uncommon Average

“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.” — David Booth

The US stock market has delivered an average annual return of around 10% since 1926.1 But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years. In most years the index’s return was outside of the range, often above or below by a wide margin, with no obvious pattern. For investors, this data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes.

Despite the year-to-year uncertainty, we can all increase the potential of having a positive outcome by maintaining a long-term focus.

Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market. The data shows that, while positive performance is never assured, investors’ odds improve over longer time horizons.


While some might find it easy to stay the course in years with above average returns, periods of disappointing results may test one’s faith in equity markets. Being aware of the range of potential outcomes can help you remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help you endure the ups and downs? While there is no silver bullet, having an understanding of how markets work and trusting market prices are good starting points. An asset allocation that aligns with your personal risk tolerances and investment goals is also valuable.

If you’d like to discuss this topic in greater detail or have any questions, please reach out to a member of your Arbutus Financial Team.