Q1 in review

Canadian equities moved higher in the first quarter, continuing the rally that began in November 2023. The gains helped the S&P TSX Index touch an all-time high in late March and exceed the previous peak achieved in early 2022. The market was propelled by favourable economic growth trends and expectations that the U.S. Federal Reserve (Fed) and other central banks will begin to cut interest rates later this year. Canada’s economy exceeded expectations in January and February, with early data indicating that GDP is on track to expand 3.5% in the first quarter. While this would delay potential interest-rate cuts by the Bank of Canada, it also demonstrates that the economy has held up well in the face of tighter policy.

The U.S. stock market posted a robust return for the first quarter of 2024, marking its best start to the new year since 2019. A resilient economy, better-than-expected corporate earnings reports, investor enthusiasm around artificial intelligence (AI), and expectations of interest-rate cuts helped fuel the market’s advance. Within the broad-based Standard & Poor’s 500 Index, nearly all sectors—apart from real estate—posted gains. Communication services and information technology stocks led the way, benefiting from their exposure to AI. Energy stocks climbed on the back of higher oil prices, while financial stocks gained from the prospect of lower interest rates. Industrial stocks also rallied nicely amid a favourable economic and interest-rate backdrop. Conversely, the real estate sector stalled amid concern the Fed might not lower interest rates as quickly as hoped.

Global equities climbed steadily higher through the first quarter, helping broad-based world indexes finish near the all-time highs achieved in late 2021. Stocks were propelled by the fact that the world economy has continued to expand despite the long series of interest-rate hikes by major central banks. In Japan, the Nikkei 225 Index hit its highest level since 1989 as the nation’s central bank moved interest rates into positive territory for the first time in 17 years. The emerging markets, although positive in absolute terms, underperformed despite China’s effort to begin providing stimulus to its economy and financial markets.

Global bond markets posted mixed results but declined overall in the first quarter as global bond yields generally moved higher. Stronger-than-expected economic growth in the United States led investors to push back their expectations for a near-term interest-rate cut by the Fed from March to June. While economic data was less robust in other regions of the globe, most notably in Europe and China, many of the world’s fixed-income markets moved in sync with the U.S. market as the Fed serves as a bellwether for other central banks. One major exception was the Bank of Japan, ending an eight-year period of negative interest rates. In this environment, bond yields were higher across most regions of the globe. On a regional basis, bond markets in the Asia-Pacific region were the best performers in the first quarter, while North American fixed-income markets underperformed. Sector wise, sovereign government bonds declined the most, while high-yield corporate bonds posted positive returns for the quarter.