Review of financial markets

I would like to wish you a happy, healthy new year. This post will provide you with a brief update on financial markets and my thoughts on what may lie ahead.

The global economy in aggregate continued to strengthen in 2014, although the improvement, as has been the case through most of the current recovery, was uneven. After shrinking in the first quarter, the U.S. economy grew at a much stronger rate than expected in the second half of the year. While not as robust, Canada’s economy also registered encouraging signs of improvement during 2014. In other regions, geopolitical events such as conflict in Ukraine and the Middle East, slower growth in China and the risk of deflation in Europe affected financial markets. Overall, the global expansion moved cautiously forward.

Global financial markets also started the year on a hesitant note, but benefited from improving economic trends and strong corporate profits through the spring and summer months. Most equity indexes were positive through the end of the third quarter, but volatile conditions surfaced in the fourth quarter as investors began to focus on the slowing pace of growth in emerging markets, particularly China. Concerns about oversupply in the energy market caused a sharp drop in the price of oil and other commodities, which was felt broadly across many markets and sectors. The price per barrel of crude dropped to less than US$50 at the start of 2015, the lowest since 2009.

Canada’s commodity-heavy S&P/TSX Composite Index was particularly volatile in the fourth quarter, staging a series of sharp declines and rebounds. The Canadian index finished the three-month period with a loss of 1.5%, but registered a respectable gain of 10.6% for the year. The falling price of oil, which is a major Canadian export product, also caused the Canadian dollar to lose value relative to the U.S. dollar. The loonie finished the year about 8% lower at 86.2 cents U.S.

The MSCI World Index, which measures large and mid-cap equities across 23 developed markets, gained 5.5% for the year in U.S. dollar terms. Accounting for the Canadian dollar’s decline, however, this gain was magnified to 15.1% for Canadian investors. The performance of the World Index reflected generally weaker results in emerging and developed markets outside North America and the robust gains for U.S. equities. The benchmark S&P 500 Index benefited from strong U.S. economic trends, growing consumer and business confidence and healthy corporate profits, adding 13.7% in 2014. Again, Canadian investors in U.S. stocks benefited from the decline in the value of our own currency, with the U.S. market up 24% in Canadian dollar terms.

 
Turning to fixed-income markets, the moderate pace of global economic activity in 2014 meant that monetary policy remained highly accommodative to growth. Although the U.S. Federal Reserve officially ended the asset purchase programs it had used to stimulate the economy since 2009, central banks in Europe, China and Japan took steps to keep interest rates low, their currencies weak and their export markets competitive. Bonds performed well in this environment. The FTSE TMX Canada Universe Bond Index, a measure of Canadian government and investment-grade corporate bonds, added 2.7% in the fourth quarter for a gain of nearly 8.8% for the year.

As we head into 2015, the global economy continues to slowly expand. Although interest rates remain low, there are some indications that rates, at least in North America, could begin to move higher in the coming year, which could be a headwind for fixed-income investments. Nearly six years after the financial crisis, equities have delivered generally positive results, but markets are cyclical, and it is always difficult to predict their direction in any given year. While the sharp drop in oil prices has weighed on the Canadian equity market in particular, it is important to remember that asset classes, industry sectors and geographic markets often move in divergent directions. Lower oil prices, for example, can be positive for other sectors as they strengthen consumer confidence and reduce costs for manufacturers, transportation companies and related industries.

In my view, recent market events support the case for maintaining a portfolio that is well diversified across asset classes, geographies and industry sectors. Diversification will help to maximize returns for your portfolio, while mitigating risks as they occur, including currency and interest rate movements.

I hope you find this overview helpful. We work hard to develop the portfolio that best reflects your long-term financial goals and tolerance for risk. Should you have questions about your investments or any other issue, please feel free to give me a call. I wish you all the best in 2015.

 

The information in this post is derived from various sources, including CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bloomberg, Yahoo Canada Finance, and Trading Economics. Index information was provided by TD Newcrest and PC Bond, and all quoted equity index returns are on a total return basis (including dividends). This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.

Diversity in your investment portfolio

I will periodically be posting information that I think is of interest and that I have received.

 

Canadians who diversified their equity exposure and invested in US Equities in 2014 made a wise decision.  The S&P 500 is up 12% YTD while the S&P TSX has done roughly 6% (price only).  With 2015 around the corner this trend looks likely to continue.  The Canadian consumer remains highly leveraged, our housing market is overvalued and a slumping oil price means eastern provinces will be under pressure to pick up the slack from those in the west.  By contrast, the US housing market looks stable, unemployment levels continue to fall and as this week’s Muse explains, American consumers are in a better position to spend in 2015 than they have been for years.

Key Takeaways

Widespread spending

• ‘I don’t think there’s a single headwind for consumers, it’s all tailwinds blowing at different strengths’ said Mark Zandi, chief economist for Moody’s Analytics Inc.
• According to a Bloomberg survey, spending is anticipated to increase by 2.7% in 2015, compared to the 2.2% growth seen in the first three quarters of 2014
• ‘We don’t have all our eggs in one basket anymore where we’re just relying on the wealthy to drive spending’ said Ellen Zentner, a senior economist at Morgan Stanley

Broad-based Hiring

• The breadth of industries hiring last month was the most extensive since 1998, a strong sign that the expansion is having widespread benefits on the economy
• Weekly earnings adjusted for inflation climbed 0.9% on average last month, the biggest increase in six years
• Consumers’ incomes are forecast to grow 1.8% over the next 12 months, the most since 2008 according to a Thomson Reuters/U of Michigan consumer sentiment surve

Middle Class

• Research by Goldman Sachs economists shows that middle-income households spend the most on gasoline as a share of total household purchases
• Furniture stores, vehicle dealers, clothing outlets, restaurants and hotels are among the retailers that benefit the most from wage growth and accessible credit, according to Morgan Stanley
• ‘You’ve got your debt down to levels that are reasonable, your labor market conditions are making some really significant gains, so people are feeling much more comfortable and they’re willing to spend’ said Michael Carey, chief economist at Credit Agricole CIB.  Carey forecast a 2.9% increase in spending for 2015

LINK: http://www.bloomberg.com/news/2014-12-19/americans-seen-getting-groove-back-with-spending-burst-in-2015.html

While there are clearly many signs that the American consumer will help to propel the US economy in 2015, especially given the current exchange rate, prudent investors will be careful not to overexpose their portfolios to US stocks.  The unpredictable nature of the markets should be enough to remind investors to focus on their long-term goals and seek a reasonable growth rate. 

Happy Holidays,

Information provided by Great West Life