Despite a tepid start to October, equity markets rallied mid-month as US industrial production surprised with a swing to the upside, and strong earnings boosted investor confidence. Corporate fundamentals still appear to be holding strong despite persistent inflation and the efforts by the US Federal Reserve (Fed) to slow it down. All Compass Portfolios saw positive returns ranging from 0.9% to 5.6% for Compass Conservative to Compass Maximum Growth respectively. The ATBIS Fixed Income Pool was the only ATBIM fund to see declines, dropping by 0.4%. Given the shorter duration, this was still better than the overall Canadian bond market, which declined 0.9% on yields that rose 0.26%.¹

Below are total returns in Canadian dollar terms for October, and year-to-date respectively:

The month’s early slide in equities could be blamed on news that was good for employees, if bad for investors. US payrolls had another positive month for September, which gave the Fed plenty of reason to move ahead with the forecasted 0.75% hike on Nov. 2. Inflation data for September fell, but when excluding energy remains elevated. However, sentiment seemed to shift mid-month as third quarter company earnings started to come in. Businesses on average are still seeing growth in revenues and earnings. Of the 316 companies in the S&P 500 that have reported so far this quarter, just under 70% have reported earnings that have beat analyst expectations. This momentum carried towards the end of the month as US GDP showed positive growth for Q3 expanding 2.6% on an annualized basis.

Canada’s job numbers were also positive for September, but Bank of Canada (BoC) governor Tiff Macklem raised target rates on Oct. 26 by 0.5% — less than the expected 0.75%. While the end of hiking likely isn’t over yet, his remarks could be the start of a pivot to a more dovish policy. He commented that the BoC expects GDP to stall in the coming quarters, and that it’s also following housing declines,  which can be an early predictor of inflation trends. Current prices according to the Canadian Real Estate Association’s aggregate Canadian home price index are down about 14% through to September since peaking in March earlier this year. Alberta homes over that same timeframe only declined about 4%. The majority of the decline has come from Toronto and surrounding areas and to a lesser extent, Vancouver, but nevertheless this is a topic on the BoC’s radar. 

While the inflation outlook is starting to improve for North America as energy prices stabilize and supply chain pressures ease, Europe is still not out of the woods. Eurostat estimates Euro inflation will hit 10.7% for October, with some countries such as Latvia reaching as high as 21.8%. Energy continues to drive inflation, rising just under 42% compared to last October. Looking at the core measure,³ inflation is still expected to reach 5% and has yet to trend downwards. The European Central Bank (ECB) has reiterated its commitment to lower inflation, and has raised interest rates 2% (from 0%) since July, increasing at the fastest rate in the ECB’s history. 

Equity holdings across regions and sub-advisors remained consistent through the month. US and international finished very close to benchmark with small-cap mandates doing well to offset the fund underweight exposure to energy in these regions — the strongest sector for the month. Canadian equities within the ATBIM funds rose by 4.5% lagging the overall S&P TSX Composite by about 1%. Energy again was the biggest factor. Within Canadian energy, the funds hold a greater proportion of pipelines that did not move up in price to the same degree as exploration and production companies.

Within the fixed-income portfolio, the shift towards quality continues. High-yield bonds sound attractive at around 9%, while default rates remain relatively low, and an earnings recession has yet to happen. Should credit conditions worsen over the coming year or two, there will be flexibility with high-quality liquid holdings that have been added this year to take advantage. Until that time, the fixed income within the funds today is priced to yield about 6%, which will provide a tailwind to future expected returns.