Market and economic commentary
October 2023

The conflict between Hamas and Israel broke out on October 7 and has dominated global headlines, contributing to market volatility, especially in its first few days. We published a brief article covering our thoughts and perceived exposures to the Compass Funds and ATBIS Pools’ (the Funds) investments. Overall though, market returns were roughly flat for the month across bonds and global equities. The Funds mainly saw negative returns ranging from 0.2% to -2.5%, with only the US Equity Pool seeing slightly positive performance for October. Up-to-date performance can be found on the ATB Investment Management website here.

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

Economics

While markets and economic data took a backseat to the conflict in the Middle East in the headlines, inflation and economic growth kept the markets on the move. The job market in both the US and Canada remained robust, as nonfarm payrolls in the US added nearly double versus expectations, and Canada added 40k more jobs (~63k total) than survey. Canada’s unemployment rates reflected these stronger job numbers, dropping 0.1% to 5.5%, although the US remained unchanged at (a still-historically low) 3.8%. Perhaps driven by the plentiful number of jobs, a surge in consumer spending sent the US economy growing 4.9% on an annualized basis for Q3—the most since 2021. While a growing economy is usually celebrated, it’s likely not what the Federal Reserve wanted to see as they fight inflation. They did get one piece of good news on that front as the US Consumer Price Index (CPI) ex-food and energy fell to 4.1%, the lowest rate since 2021. 

Energy markets had climbed through September after Saudi Arabia and Russia decided to extend output cuts through year-end. Prices, however, reversed their decline through October, with West Texas Intermediate (WTI) falling from about $90 USD to $81. So far, the Israel-Hamas conflict has not hindered energy supply, according to the International Energy Agency. The price decline through October is more likely to be related to the reports of gasoline demand in the US falling to two-decade lows and slower-forecasted overall global economic growth, lessening near-term oil demand. 

The TSX Composite returning -3.2% for the month—worse off than the US and International equities—would typically be associated with energy prices. However, the energy sector saw little to no price movement. It was largely due to financials, which, overall, continued to decline. Investors anticipate further loan loss provisions, and rising deposit rates will pressure margins in the near-term. Valuation-wise, banks in Canada are trading at some of the lowest multiples witnessed in the last couple of decades, which begs the question of whether further selling is warranted. Shopify fell 11% through the month and was the largest detractor to performance for the TSX Composite Index. The Funds do not hold Shopify, which helped to dampen the effect overall on the Canadian equity portion of the Funds.

US equities within the Compass Portfolios and ATBIS US Equity pool were roughly flat. Like Canada, it was avoiding a name¹—Tesla, which was down 18% and the top detractor for the S&P 500 Index—helping to mitigate some downside. Overall, the Mawer US mandate saw returns of about 1.8%, offsetting small- and mid-cap US equity returns, which declined more than large-cap stocks for the month. The Mawer International mandate— which was nearly flat for the month—helped to lessen the downside for the Compass Portfolios and ATBIS International Pool. BAE Systems was the most significant contributor to the Mawer International mandate. Based in London, the company delivers defence and aerospace systems. European defence stocks, in general, increased through October in the wake of the Israel-Hamas conflict.

Lastly, turning to fixed income, a decline in bond yields finally provided a bit of relief to prices in October. Along with that, however, credit spreads widened. The move was only slight for investment grade credit, but high yield spreads—which have declined for much of the year and remain below long-term averages—saw some expansion through the month, leaving overall US high yield down 1.25%². The Funds that hold bonds aren't overly exposed to high yield at this time but still have about 11-12% of the fixed income allocation within high yield. This left performance for overall fixed income roughly flat for October. 

¹ Tesla is held passively through the Blackrock Canadian US Equity Index Fund and BMO S&P 500 Index ETF at a 1.6% weight within those holdings but not through Mawer US. On a look-through basis as of October 31, 2023, Compass Conservative Balanced has a 0.03% exposure, Compass Balanced has a 0.05% exposure, Compass Balanced Growth has a 0.2% exposure, Compass Growth has a 0.24% exposure, Compass Maximum Growth has a 0.31% exposure, and the ATBIS US Equity Pool has a 0.32% exposure.

² Bloomberg U.S. Corporate High Yield Total Return Index Hedged CAD