Resilient Markets
After a strong first half, most major indices finished the third quarter slightly higher, and both the TSX and S&P 500 entered the fall with double-digit gains for the year. That steadiness stands out given how much markets had to absorb.
As we cautioned last quarter, the June ceasefire did not bring a lasting resolution in the Middle East. In September, renewed attacks on shipping in the Strait of Hormuz and a drone strike that temporarily shut Saudi Arabia’s East-West pipeline pushed oil back above US$100 per barrel. For Canadian investors, the bright side was a strong quarter for energy stocks.
AI stocks had a sharp but short-lived sell-off from late June through July, led by chipmakers and memory producers, and many recovered a good part of their losses by quarter end. Expectations remain high, so attention is turning to whether all of this spending will pay off, a question we raised last quarter.
In Canada, tech stocks bounced back from a difficult first half and financials extended their gains, while telecoms lagged. Internationally, defensive sectors such as consumer staples and healthcare trailed the broader market.
Higher Yields
Inflation proved stickier than hoped. Oil was the biggest driver, with tariffs also increasing the cost of some goods. Canadian inflation held around 3% through the summer, while U.S. inflation reached 3.4% in August. In response, the U.S. Federal Reserve raised rates in September for the first time since 2023, and the European Central Bank and Bank of Japan also hiked. The good news is that price pressures outside of energy are only modestly elevated, so if oil eases, inflation could follow.
Bond yields rose along with inflation, and Canada’s 10-year yield reached roughly 4% in late September. Rising yields hit long-term bond prices the hardest, which is why we prefer shorter-term bonds. The upside is that bonds now pay more income than they have in the last couple of years.
Higher rates also affect how stocks are valued. A stock’s price is based on the profits investors expect a company to make in the future. When rates rise, investors can earn more from safer options like bonds, so they discount those future profits more heavily. The further away the profits are, the bigger the discount. That’s why rising rates hit hardest where investors are paying a high price today for profits that may not arrive for years. Companies already earning solid, dependable profits are generally less affected, and that’s where we like to focus.
Trade Tensions
Canada-U.S. trade talks broke down in August. The U.S. imposed new tariffs on August 22, and Canada responded with its own three days later. The headlines were concerning, but nearly 80% of Canadian exports to the U.S. still cross the border tariff-free.
The Canadian economy entered this period on solid footing, growing at an annualized rate of 3.3% in the second quarter. Early data show growth slowed sharply over the summer, though corporate earnings remain healthy. That leaves the Bank of Canada with a balancing act. It held rates steady in September as it weighs a softening job market against above-target inflation.
Our Perspective
We remain optimistic and disciplined. We favour businesses with sustainable growth, dependable cash flow, and the ability to pass rising costs on to their customers. At the same time, we’re cautious about paying up for companies whose share prices assume everything will go right. This approach has served clients well this year, and it leaves us ready to act if volatility brings quality businesses to more attractive prices.
We head into year end confident in our approach.
Connect With Us!
We hope you’re enjoying the fall season. If you have questions about your portfolio, your financial plan, or anything in this update, we’d be happy to connect.
