Trade negotiations were once again the prevailing issue influencing headlines and global markets over the third quarter. Perhaps the most consequential for us here in Canada occurred on the last day of September, with the announcement that an eleventh-hour deal was struck on revising the North American Free Trade Agreement (NAFTA), thereby maintaining the trilateral nature of the pact. With the threat of immediate U.S. tariffs on Canadian exports removed, the growth outlook for Canada in the fourth quarter, into 2019 and beyond is expected to improve, allowing the Bank of Canada to continue normalizing interest rates and providing support to the Canadian dollar.

As we look ahead to the fourth quarter, there is no shortage of reasons for apprehension: continued trade conflicts, budget disputes between Italy's new populist government and the EU, the start of U.S. sanctions on Iranian oil, ongoing economic calamities in Turkey in Argentina, and the upcoming U.S. midterm elections. However, fundamentals and confidence continue to be strong in most developed countries and provide ongoing support for equity markets, leaving us optimistic for the medium term. Here's our outlook for the remainder of 2018 and beyond:

Synchronized global growth continues to be solid

While the broad-based acceleration has subsided for the moment, the absolute level of growth appears to be solid. Ongoing trade friction and rising energy prices remain a concern.

Monetary policy normalization begins

The U.S. Federal Reserve, Bank of Canada and Bank of England have all raised rates recently, and the European Central Bank remains on schedule to wind down their asset purchasing program by year-end, with rate hikes expected in late 2019. Only the Bank of Japan has pledged to continue its bond buying and zero interest rate policy.

Inflation and rates continue to drift upward

Inflation appears stable for the moment, near to central bank targets and expectations remain well contained. We are watching for any signs of increased inflation in the U.S. as a result of import tariffs, as these now cover a large selection of products used at every stage of manufacturing and retailing.

Earnings driving equity gains, increased dispersion

We are expecting solid earnings growth to persist and a reinforcing cycle of reinvestment and capital expenditure should add further runway to the current expansion. Late in the quarter, we started to see a rotation from some of the large cap growth names that have led the market higher over the past two years into more stable, value-oriented stocks.

Volatility has returned to the market

As discussed earlier, there is no shortage of events on the horizon that could lead to increased market volatility and potential drawdowns. We continue to view the overall environment as equity-friendly but we remind our clients to diversify and to remain within their target allocation bands.

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