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Monthly Review of the Markets – April 2018

Despite little changes in the various indices, the month of April was particularly busy.

President Trump's announcements about possible tariffs on aluminum and steel, among other things, and possible retaliation by the Chinese authorities marked the beginning of the month as markets were particularly worried that a trade war would derail a market by elsewhere particularly strong.

Staying on the political side, President Trump, in collaboration with his French and British partners, launched an attack on Syria which, like the trade war with China, seemed to worry the market in the short term. However, as in the case of the trade war, these fears dissipated quickly as investor attention quickly turned to the most recent quarterly financial results.

Due to the good performance of the economy in general and especially the recent tax cuts, Wall Street was eagerly awaiting the announcement of these results which, according to the consensus of analysts, should see earnings per share increase by 18% over the same quarter last year; the best quarterly increase since the 2008 crisis.

Since the beginning of earnings season, approximately 80% of S&P 500 companies that reported their results have delivered better than expected returns. Although they are healthier than the best forecasts of the past 10 years, these results have not had the effect of raising indices as much as could have been anticipated.

On another note, the Bank of Canada kept the rates unchanged at its April meeting and the US Federal Reserve did not meet in April. However, on both sides of the border, analysts continue to expect many rate hikes over the next few years. With this in mind, 10-year US bonds touched a high and even closed over 3% in April, which explains the very mundane performance of the indices as profits are rising rapidly.

Below you will find a summary table of the level and performance of various North American indices as well as the price of a barrel of oil and an ounce of gold in April.

Index Value at March 31,
2018
(No of points)
Value at April 30,
2018
(No of points)
Monthly Return
S&P/TSX 15,367.29 15,607.88 1.57%
Dow Jones 24,103.11 24,163.15 0.25%
Nasdaq 7,063.45 7,066.27 0.04%
S&P 500 2,640.87 2,648.05 0.27%
Barrel of Oil (WTI) $64.89 $68.57 5.67%
Gold (ounce) $1,329.60 $1,319.20 –0.78%

As nearly 20% of this index represents the energy sector, oil's gain of 5.67% is the main reason the S&P/TSX outperformed US indices.

A strong performance from the leaders in the sector – Suncor (10.36%), Canadian Natural Resources (14.37%) and Imperial Oil (17.03%) – allowed the Energy Sector Sub-Index to be the strongest sub-sector and achieve a monthly return of 6.99%.

The industrial sector grew by 2.85% and thus posted one of the best sector performances due, among other factors, to the strong rise of CN (5.32%), Bombardier (5.87%), WSP (7.13%) and especially TransForce (12.26%).

Among the losers, despite a rise in Valeant (13.02%), the health sector fell by 3.47%, mainly due to the weakness in the market for recreational marijuana, as evidenced by declines in leading stocks Canopy (–10.55%) and Aurora (–13.01%).

Other stocks that caught our attention due to positive performance included Cameco (15.46%), Rogers (5.34%), Magna (4.49%) and The Stars Group (12.32%), the strong growth of the latter resulting from the announcement of a major acquisition in Europe.

Among the stocks whose performance were negative in April, we note Restaurant Brands (–4.71%), which suffered from the decline in popularity of its subsidiary Tim Horton, BlackBerry (–9.25%) and especially Kinder Morgan Canada (–9.70%), which has been discussed daily in the news as a result of its decision to terminate its Trans Mountain Pipeline Expansion Project, a highly contested project.

The Dow Jones index moved very little during the month of April. Despite this sluggishness, some stocks in the health sector were particularly notable, including United Health Group (10.47%) and Merck (8.08%).

In addition, similar to what was observed in Canadian markets, April's rise of 5.67% in the price of oil helped US energy stocks Exxon Mobil (4.21%) and especially Chevron (9.71%), which participated nicely in the index's positive performance.

McDonald's stock (7.07%) also had a very good month following the disclosure of better than expected earnings, while the shares of 3M (–11.45%) and Procter and Gamble (–7 85%) declined due to disappointing results.

In April, the Nasdaq index barely moved. Like the Dow Jones, this stability did not prevent some stocks from shining. Tesla (10.43%) and especially Baidu (12.42%) performed better in terms of percentage (the latter because of its weight in the index, but also its importance in different sub-sectors such as cloud computing, retail and artificial intelligence), but it was Amazon (8.41%) that caught the eye. Facebook (7.64%), which experienced many difficulties following the Cambridge Analytica issue, also performed very well, having published results that were significantly better than market expectations.

Conversely, the semiconductor sector led the way down, headed by Micron (–11.81%) and Applied Material (–10.68%). Some more traditional sector names – Kraft-Heinz (–9.49%), Pepsi (–7.52%) and Comcast (–7.58%) – also reduced the Nasdaq index's performance.

As in the case of the S&P/TSX, the S&P 500, made up of the 500 largest US companies, benefited greatly from the rise in the price of oil in April. In addition to Exxon Mobil (4.21%) and Chevron (9.71%) already mentioned in the above, note the excellent performance of Conoco Philips (10.47%) and especially Valero (19.58%).

Another sector that stands out is consumer goods, which is up 3.07%. However this increase conceals a much less rosy situation: the significant space occupied by Amazon (8.41%) in this sub-index and the strong performance of Best Buy (9.34%) following an agreement with... Amazon (!) hides the weakness of some sector stocks such as eBay (–5.86%), Limited Brands (–8.64%) and Lowe's (–5.60%), and the marked decline in the casino sector as illustrated by the major drop in MGM Resort (–10.28%).

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All data are from Morningstar (©Morningstar).

The author

Steve Deschesnes

Steve Deschesnes

Disnat GPS Portfolio Strategist