Q3 2023 in review

Canada’s stock market experienced a modest decline in the third quarter due to the combination of reaccelerating inflation, concerns that central banks may keep interest rates elevated for an extended period, and signs of slowing global growth. Rising bond yields also weighed on investor sentiment. All of the market’s downturn occurred in the second half of September, which is traditionally a period of seasonal weakness for equities. Despite the recent slump in stock prices, Canada’s market finished September in positive territory on a year-to-date basis. Energy stocks, which rallied behind the strength in crude oil prices, were a key contributor to third-quarter performance. Cannabis-related equities also performed well due to favorable regulatory changes in the United States. On the other hand, financials and gold miners lagged.

After advancing in July, U.S. stocks slid in August and September. Equities initially benefited from better-than-expected employment numbers, inflation data, and corporate earnings. However, investors reacted negatively as the yield on 10-year U.S. Treasuries later climbed to its highest level in 16 years. Yields rose as a resilient economy reduced the likelihood of a near-term interest-rate cut. Elevated yields gave investors an attractive alternative to equities but also resulted in higher borrowing costs. Within the broad-based S&P 500 Index, most sectors declined, notably the defensive utilities sector and interest-rate-sensitive real estate sector. Conversely, the energy sector gained as oil prices rallied, while the communication services sector benefited from a sizable advance.

The world equity markets lost ground in the third quarter. A string of weaker-than-expected economic data and renewed instability in China’s property sector raised the prospect of slowing global growth. The losses were widespread, with few regions, countries, or sectors able to escape the downdraft. On the positive side, Japan produced a narrow gain. On the other hand, the major world indexes were dragged down by underperformance for both Europe and Latin America.

Global bond markets declined in the third quarter. Bond yields rose sharply around the globe, putting downward pressure on bond prices. Central banks such as the U.S. Federal Reserve, European Central Bank, and the Bank of England all raised short-term rates during the quarter. Economically, labor market tightness began to ease in many regions of the globe, but other reports showed strength in consumer spending and an uptick in the year-over-year inflation rate after nearly a year of declines. Intermediate- and long-term bond yields increased the most in the third quarter, with 10-year government bond yields in many countries rising to their highest levels in more than a decade. Regionally, North American bond markets declined the most, while the Asia-Pacific region held up the best despite a loosening of interest-rate limits by the Bank of Japan. From a sector perspective, sovereign government bonds posted the most significant declines, while high-yield corporate bonds outperformed for the quarter.