Canada – The Canadian equity market broke its upward trend and fell in the second quarter; the broad market fell -1.6% while small cap and value were hit harder, falling -5.5% and -3.4%, respectively. Large caps also fell by -1.8% and only growth stocks were ahead by 3.0% this past quarter.
United States – The rally in US stocks ran out of steam and the market was barely positive, advancing just 0.3% for the quarter. Small cap and value were the weakest, falling -0.7% and -1.4%, respectively. Large caps advanced 0.5%, while the strongest performance was growth which was up 1.9%.
International & Emerging Markets – International and emerging markets were the strongest performers again this quarter, although somewhat more subdued than in Q1. International was up 3.6% (compared to 6.8% in Q1) and emerging markets also gained 3.6% (compared to 10.9% previously). International small caps were the big winner, gaining 5.5%, following by growth at 4.9%, large caps at 3.3% and finally value at 2.3%.
Politics and the Markets
The world has now experienced over 160 days of the Trump Presidency and some may be wondering “to what extent do politics affect the stock markets”? While markets don’t ignore politics, the real drivers are company profits, valuations and economic data.
For interest sake, let’s look back at two historical events that occurred over the past 45 years as we may be heading towards a third – impeachment. Why impeachment? There is enough smoke coming from the investigation into links between the Trump campaign and the Russian government to make an eventual impeachment a possibility.
There have been two impeachments in modern times: Nixon in 1974 (he resigned before he could actually be impeached) and Clinton in 1999 (he was impeached by the House of Representatives but acquitted by the Senate). Both cases are also interesting as Nixon occurred during a severe bear market, while Clinton occurred during the start of a two year bull market.
Will history repeat itself if there is another impeachment? It’s hard to say. As pointed out above, the markets seemed to shrug off the political events even during the seriousness of Watergate, however, given the unprecedented allegations of potentially colluding with the enemy to win a Presidential campaign, there is the possibility for much greater volatility if they are proven.
The Russian investigation isn’t the only risk coming out of the Trump administration. Health care reform failure is a real possibility which would likely derail the much anticipated changes to corporate taxes. Expectations for tax reform that are built into current valuations would be a negative for the market. These two failures would call into question whether Trump could actually accomplish anything he promised during the campaign.
An increase in future overall market volatility is widely expected, but it’s necessary to filter out what is noise (reactions to the most recent political events) versus those that are tied to economic data, company profits and valuations – these will have a much greater and longer term impact on markets.
Scott Eicher, CFA, CFP