Equity markets pulled back in the past three months and aside from the United Kingdom FTSE index, global benchmarks declined in the third quarter. The Canadian S&P/TSX index was down 3% in the quarter and is barely on the positive side, up 0.8% since January. The S&P500 US index dropped 3.6% in the last three months but remains up 11.7% year to date. Similarly, the MSCI World index declined 3.8% in USD in the third quarter but is up 9.6% since January. Despite its pullback during the quarter as well, the Nasdaq index remains the strongest benchmark so far in 2023, with a 26.3% gain.
Inside the markets, most subsectors had a difficult quarter and were negatively impacted by rising interest rates and the uncertain economic backdrop. Inflation remains elevated and the higher interest rate environment appears that it may stick around for longer than some had originally anticipated. The energy sector was really the sole exception to have a strong performance in the past quarter, lifted by rising oil prices.
The Bank of Canada (BoC) and the Federal Reserve (Fed) both raised rates by 0.25% in the third quarter, with both continuing to gradually tighten monetary policy and repeating the skip then hike established earlier in the year. The overnight rate for the BoC is now at 5.00% and the Fed Funds rate is at 5.25% - 5.50% range. There remains the possibility of a further rate hike ahead, but the inverted yield curve signals rates are expected to eventually ease back.
Though we expect volatility in the overall equity markets in the months ahead, we feel confident that our equity holdings can allow us to navigate through these ups and downs. There is currently a big disparity in overall equity prices. The key is to be selective, a little patient, and not let the headlines derail you from your overall investment plan. Many of our holdings pay attractive dividends that are sustainable and provide a very attractive source of income. Liquidity and income requirement for clients are covered by our short-term bond holdings. Hence, our clients have the ability to stay the course with their investment plan, which history shows, is the right thing to do.
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1. Make 2023 RRSP contribution as soon as funds are available. The maximum is 18% of 2022’s earned income to a maximum of $30,780.
2. Make 2023 $6,500 TFSA contribution as soon as funds are available. The maximum if you have never contributed is $88,000.
3. Make $2,500 annual RESP contribution per child to benefit from the 30% combined government grants.
4. Review asset allocation to make sure it is in line with current objectives and risk tolerance and inform us of any special income need for this year.
The calculation of performance data set forth herein has been prepared by the author as of the date hereof and is subject to change without notice. The author makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions, which are accurate and complete. However, BMO Nesbitt Burns Inc. ("BMO NBI”) makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to BMO NBI or its affiliates that is not reflected herein. This report is prepared solely for information purposes. Please note that past performance is not necessarily an indicator of future performance. The indicated rates of return are gross of fees or commissions. Individual results of clients' portfolios may differ from that of the model portfolio as fees may differ, and performance of specific accounts is based on specific account investiture. The noted model portfolio portfolio may not be appropriate for all investors
11 Sources: Bank of Canada, Bloomberg, BMO Capital Markets