2023 Second quarter market review

In the second quarter of the year, U.S. equities performed strongly, there were mixed results for Canadian and international equities, bond yields rose, and interest rates continued to climb. 


The rally in U.S. equities was largely driven higher on what many would call an AI-fuelled rally. On the other hand, Canadian equities experienced only a slight gain, due to lower commodity prices, particularly oil.

International equities remained relatively flat during the quarter; underperformance from Europe and the U.K. was balanced by Japan's equity index reaching its highest value since 1990.

North America bond yields rose as inflation continued to trend downwards (albeit slower than central bankers would have liked). The Bank of England, Bank of Canada and Federal Reserve all raised interest rates this quarter.

The difference in yield between the Canadian and U.S. 2-year government bonds decreased by 20 basis points, contributing to the loonie gaining value over the U.S. dollar.

Canadian equities

The S&P/TSX Composite Index had a modest gain of 0.28%. A key positive contribution came from the IT sector, with an increase of over 16%. This offset much of the underperformance from the other sectors, specifically the real estate sector and materials companies (which saw a drop in precious metal prices, including gold).

Positive contributions during the quarter came from Air Canada and Shopify, which gained 30.5% and 32.1% respectively, as consumers continued to drive performance in retail spending and travel.

U.S. equities

The S&P 500 Index was flat through the first two months of the quarter, with most of the gains coming in June; it ended the quarter at +8.30% (+5.95% in Canadian dollar terms). The IT and consumer discretionary sectors were the main contributors, while the utilities and energy sectors lagged. 

Earlier concerns about the regional banking sector’s liquidity mostly subsided, as financials gained 4.83% during the quarter.

IT stocks gained 16.93% (in U.S. dollars), with a broad cross-section of companies gaining. Nvidia led in tech stocks this quarter (+52.29%), bringing its year-to-date return to 189%.

International equities

The Europe, Australasia and Far East (EAFE) Index saw modest gains of 1.87% in U.S. dollar terms (-1.04% in Canadian dollars).

The U.K.’s FTSE 100 Index lagged other international markets (down 1.31% in U.K. pounds). European markets, as measured by the EuroStoxx 50 Index, returned a positive 1.95% (in euros).

International markets saw more modest gains, influenced by China’s growth underperforming expectations. The bright spot was Japan, with the TOPIX Index gaining 14.23% (in Japanese yen).

Fixed income

Bond yields rose after renewed interest rate increases by key central banks, including the Bank of Canada, U.S. Federal Reserve, Bank of England and European Central Bank. As a result, bond returns fell during the quarter (as bond yields rise, the price of bonds fall).

The Bloomberg Global Aggregate Index returned -1.53% (in U.S. dollars) while the Canadian Universe Bond Index retreated by -0.69%.

U.S. high yield bonds fared better, with the ICE BoA US High Yield Index gaining 1.63% during the quarter in U.S. dollar terms (but -0.63% in Canadian dollar terms).

Looking ahead to the rest of the year

Fears of a looming recession have led to lower commodity prices, which, along with rising interest rates, pose additional challenges to Canada's year-end outlook. However, the lower valuation of the S&P/TSX Composite Index would suggest these conditions may already be factored in.

Despite modestly rising rates during the quarter, bonds remain attractive for the immediate future.  

We still face stickier-than-expected inflation, increased central bank interventions and a slowing economy. While a cautious approach may be wise, we remain selective and cautiously optimistic about equities.

International and emerging markets remain promising for diversification benefits, while profit-taking in the highly valued U.S. markets could prove beneficial. It's essential to remember that investment decisions are not binary — this past quarter is a testament to that.