Welcome back. My name's Brent Joyce. I'm the Chief Investment Strategist for BMO Private Investment Council. It's September the 29th. We're going to cover the month and the quarter in our global monthly market commentary. September saw both stocks and bonds decline, reinforcing its reputation as an ugly month for investors, and that goes all the way back to 1950, so the anxiety is justified. This year, September was a disappointing end to a disappointing third quarter. Remember, we had roaring gains in July for equity markets, but those now seem like a distant but fond memory. Weakness in August accelerated and September certainly sunk the quarter. All three months in Q3 were losers for the Canadian bond market, turning the year's first half gain of about 2.5% into a year to date loss of near 2%. Now there are pockets of positive performance in the bond market. Year to date Canadian investment grade and high yield corporate bonds remain in the black, and we do have these bonds in our portfolios.
Tandem declines for stocks and bonds feels like a nasty flashback to 2022, but some perspective might help here. The magnitude of the decline is actually much smaller. It's just a single quarter, and the overall situation is less precarious than it was in 2022. Year to date gains in most equity markets, including reinvested dividends, remain positive on a total return basis.
Now many clients are telling us they're frustrated with the perception that Canadian equities have been underperforming. And so far this year that's true, but it's important to take a step back and take a more fulsome look. Since January of 2022, when most equity markets last sat at their all time highs, the S&P 500, the TSX here in Canada, and the MSCI EFI Index, which is a basket of international developed market stocks, all three of these on a total return basis in Canadian dollars are pretty much running neck and neck. If you'd invested $100 Canadian in any one of them at the beginning of last year, that today sits between 97 and $99. Now, this can generously be described as a flat return, but given the excesses and the imbalances in the economy and the markets that we've had to navigate, these results are better than feared.
So what are these imbalances? Overall, the main question for the economy remains whether deliberately slowing growth to quell inflation will produce a soft landing, hard landing, or no landing. The jury's still up. When central banks raise interest rates to deliberately slow the economy to tamp down inflation, we are intentionally forcing the economy's growth rate to shrink. As that growth rate gets closer towards zero, market turbulence is to be expected.
Now, turbulence is caused by crosswinds and updrafts just like an airplane, and the known crosswinds are higher borrowing costs and what's a depleting household savings. These are factors that hamper economic growth. Growth is diverging across the globe. The US economy appears quite resilient, but it's not immune. Canada is slowing. Europe has hit stall speed and China remains stuck on the ground. Now the updrafts, this is labor unrest, higher oil prices, and in the US we can add in a potential government shutdown. And there's also the restart of student loan repayments. With all of this, the equity market gets pretty queasy.
Market turbulence is about higher for longer for now. The root of the volatility in capital markets as of late does start with the bond market. Bond yields moved substantially higher in the third quarter with 10 year bond yields jumping by about three quarters of a percent. They pushed through 4% in Canada and above 4.5% in the US. The move higher in the third quarter was less about inflation and more about a move up in real yields, something we've talked about in prior episodes. Now, real yields move for various reasons, but an important one is that they bear a close relationship to real economic growth. And here the US is driving the bus and all other countries are simply hanging off the bumper. US growth remains strong and inflation there is behaving better than most everywhere else. Another important driver of real yields is supply and demand of bonds.
Again, the US is leading the charge. While most western governments face large deficits, the US budget deficit is ballooning and there is no help that they're arguing over where it's headed with this potential government shutdown. So with US bond yield higher, unfortunately, the rest of the world generally must follow suit. However, central banks appear very close to ending their rate hiking campaigns. Canadian, US, UK, central banks, they all paused in September. Now, we recognize that there has been a recent uptick for inflation, but it does remain well off its prior year highs. We believe the end of rising bond yields is approaching. That doesn't mean bond yields come down. If yields stay flat, this is the higher for longer story that does deliver higher income for longer, and that's a positive for bond investors. Should yields fall, and if inflation resumes a downtrend that we would expect they would, then the pain of getting to higher yields is like compressing a coiled spring. That elastic energy releases in the form of higher bond prices, delivering capital gains to investors. This might be more of a 2024 story, but we are preparing for it now.
Higher for longer is giving stocks indigestion. If we need interest rates to stay higher for longer, that likely spells slower for longer economic growth. When economic growth is low, investors fret that any shock or misstep could send the economy careening into a contraction. Now, a contraction is certainly bad for Main Street, but it's also bad for corporate earnings. The economic pie is smaller. It's also bad for corporate earnings that things are eating into profit margins, which is thought of as how much a company can ring out of the economic pie.
Companies currently face higher costs for borrowing, labor, and now energy. These all eat into profits. The result has been no earnings growth for five quarters. It's not surprising that markets have gone sideways for just as long. Earnings slumps come and go. This is a normal part of the business cycle and has happened many times in the past. In fact, this represents the fourth earnings slump since 2009. The previous earnings recessions and sideways returns for equity markets ranged in age from about four quarters to as long as seven quarters, and they all featured heightened volatility, the turbulence that we're having. Like the others though, this period will pass too. And with five quarters of earning slump under our belt, we are past the shortest ones and more than halfway through what was the longest ones historically.
So what do we see from here? Looking forward, there is still some work to do to overcome various obstacles, but stock and bond markets are setting the stage for better results ahead. Once inflation is closer to being tamed, businesses and households will be poised to benefit from lower borrowing costs and easing price increases. This is fertile environment for stocks, especially when accompanied by mostly reasonable equity market valuations like we have today. With earnings growth forecasts for 2024 of roughly 10% in North America, stock markets have room to make additional advances in the year ahead. We see September's declines as padding our forward return forecasts. Thanks for joining us. We'll see you next time.
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