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S&P 500

Michael Nagle

A ripping rally followed the U.S. presidential election of 2016, as investors celebrated Republican plans for tax cuts and relaxed corporate regulations, much of which are now reality. But the U.S. benchmark index has been wobbling this year. Market watchers have blamed the spike in volatility – and disappointing year-to-date returns – on rising bond yields, escalating tensions over global trade and a flattening yield curve that may be pointing toward slower economic activity. Even the so-called FAANG stocks (Facebook, Amazon.com, Apple, Netflix and Google) have lost some of their momentum as investors cut back on risk. But corporate profits are booming, thanks in part to those tax cuts, which has lowered valuations in the eyes of bullish investors. What’s more, the U.S. economy is humming with a low unemployment rate. Market watchers, though, will be keeping an eye on the U.S. Federal Reserve, which is on track for four rate hikes this year.

Consensus year-end forecast: 2,944 (up 8.3 per cent per cent)

S&P/TSX Composite Index

Frank Gunn

Canada’s benchmark index has hit a couple of record highs this year – one in January, another in June – but it doesn’t have much to show for it: Gyrating oil stocks, struggling pipelines, weak utilities and flatlining banks have led to a year-to-date gain of 0.4 per cent. And in U.S.-dollar terms, the index is down 3.9 per cent, making it a laggard among developed markets. Ongoing concerns about Canada’s housing market may be weighing on the banks, while slower economic growth relative to that of the United States may be putting off international investors. There’s also the issue of simmering trade concerns: What happens to Canadian exporters if the North American free-trade agreement dies? Nonetheless, some observers see a glass that is half-full: Rising oil prices should help energy stocks; a strong U.S. economy is bound to rub off on Canada; and cooler heads may prevail in ongoing trade negotiations.

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Consensus year-end forecast: 16,825 (up 3.3 per cent)

Crude oil

CHRIS HELGREN

The global economy has been expanding nicely, while the Organization of the Petroleum Exporting Countries (OPEC) has been holding back on production increases – conditions that have been providing a boost to the price of West Texas Intermediate oil. Oil ended the first half of the year near a three-year high of US$74.15 a barrel, up from about US$60 a barrel at the start of the year. The rising price is feeding into much higher gasoline prices, stoking concerns about a hit to consumer spending. But energy producers are doing well: Canada’s Suncor Energy has seen its share price rise about 15 per cent since January. Some observers, such as RBC Dominion Securities, expect oil prices will average US$68 a barrel this year amid strong global demand, low storage levels and production challenges in Venezuela, Iran and even OPEC.

Consensus year-end forecast: US$64.50 a barrel

Canadian dollar

Mark Blinch/REUTERS

Rising oil prices should be sending the loonie flying against the U.S. dollar. Not this year, though. The Canadian dollar, which traded above 81 US cents near the start of the year, is in a slump; it ended the half-year mark barely holding at 75 US cents, as financial markets have focused their attention on what’s going on in the United States. There, the Federal Reserve has been raising its key interest rate more aggressively than Canada’s central bank, amid stronger U.S. employment figures and inflationary pressures. With the Fed on track for a total of four rate hikes in 2018, against the Bank of Canada’s expected two, the U.S. dollar has been on a tear. Expect the loonie to perform better if Canada’s central bank hikes rates soon. “If not,” said BMO Nesbitt Burns economist Sal Guatieri, “the only thing that will save the loonie is a parachute.”

Consensus year-end forecast: 78 US cents (or $1.28 Canadian)

Bonds

Getty Images/iStockphoto

Rising bond yields have riveted observers this year and have received much of the blame for the dramatic stock market meltdowns in February. Many investors have seen ultra-low bond yields as fuel for the stock market: With bonds delivering paltry returns, why venture beyond stocks? But this approach looks less convincing with yields on the rise. The yield on the 10-year U.S. Treasury bond rose above 3 per cent in April, and the Government of Canada 10-year bond rose as high as 2.537 per cent, weighing on the valuations of many dividend stocks, such as utilities and real estate investment trusts. However, bond yields have retreated from their earlier highs, leading to a new concern: Are lower yields signalling problems in the economy? For now, economists expect them to rise again – but this will definitely be a key area to watch in the second half of the year.

Consensus year-end forecast for U.S. 10-year yield: 3.17 per cent.

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*Source for consensus estimates: Reuters for TSX, Bloomberg for all others.

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