The S&P 500 in the fourth quarter was muted compared to the strong third quarter where it hit its highest level in five years. The total return for the S&P 500 in the fourth quarter was -0.38% in US$ or 0.76% in C$ as a result of a weaker Canadian dollar in the quarter. The TSX managed to fare a little better with a total return of 1.72% during the fourth quarter. While the S&P 500 began October trading near record highs, there were concerns about the impact Hurricane Sandy would have on earnings and it was reflected in downward pressure on stocks in late October. This was followed by a sharp selloff post the U.S. Presidential election in November as news about the fiscal cliff dominated the headlines. The market was concerned because if no budget deal was reached by year end, it would result in automatic spending cuts and higher taxes in 2013.Although political brinkmanship ended up pushing the U.S. economy over the cliff, at least for a few hours, the extraordinary New Year’s Day compromise was a welcome relief for the markets going into 2013. Both political parties seemed to save face as the agreement raised taxes on the wealthiest 2% of Americans but permanently codified all tax brackets for everyone else. This one source of uncertainty held back consumers and businesses in 2012. The markets celebrated the economy avoiding a major dip in GDP by advancing the S&P 500 with its biggest one day advance in over a year during the first trading session of 2013. However, the issue is far from being fully resolved, as the deal focused only on the revenue side of the equation and has yet to address spending, the debt ceiling and the continuing resolution of the fiscal year 2013 budget. One economist referred to these issues as the three gorges that must be dealt with during the first quarter of 2013.

…

After a weak second quarter that saw the S&P 500 ($U.S.) fall 2.8% and the TSX down 5.7%, both U.S. and Canadian equity markets rallied in the third quarter on stronger than expected second quarter earnings and the prospects that central bankers would provide more monetary stimuli to help bail out stagnating global economies. On July 26th ,the market seemed to get exactly what it wanted when the European Central Bank president, Mario Draghi, said he would do whatever was needed to keep the continent’s monetary union in place to preserve the Euro. Then on September 13th, in a widely anticipated move, the Fed announced that it would purchase $40 billion a month in mortgage-backed securities. Unlike previous rounds of quantitative easing, Mr.Bernanke did not set a limit on how much the Fed would spend and instead tied the timeline of commitment to improving labour markets. The Fed also extended its commitment to keep interestrates “exceptionally low” to at least mid-2015 from late 2014. While the Fed response in general was widely anticipated, what was surprising was the openended nature of this third round of quantitative easing.

…

After a strong start to the first quarter of 2012, in the second quarter investors were once again reminded of the macro risk factors facing the global economy and the European sovereign-debt crisis in particular.April returns were more or less flat in both Canada and the U.S. equity markets as Q1 earnings reports were generally better than consensus expectations.Actual Q1 earnings reports showed +7.3% year over year growth compared to negative expected growth for consensus earnings estimates. However, May was dominated by a series of unfavourable economic reports that supported the old adage: “sell in May and go away”. Between weaker than expected data on European private sector business activity, Chinese industrial production and U.S. jobs, both the U.S and Canadian stock markets lost over 6% in May alone. This culminated with the S&P 500 testing the lows of its 200 day moving average on June 4th but quickly snapping back

It was only a few short months ago when the Eurozone was in the midst of a liquidity crisis that felt like it was about to morph into a global contagion. And despite the initial widespread skepticism around the efficacy of the Long Term Refinancing Operation (LTRO), it clearly provided the necessary liquidity for the European banking system. Once those fears subsided, the market redirected its concerns from the European sovereign debt crisis to a number of economic indicators in the U.S., the world’s largest economy.

…

The ECB Joins “Club Fed” (through the Backdoor)

Despite its constant protestations that it would not embark on a program of Quantitative Easing, this week the ECB has in effect started doing exactly that (well, almost exactly) in an attempt to keep the European debt crisis from spiraling out of control. The official name of the program is the Long Term Refinancing Operation (LTRO) and its official purpose is to relieve liquidity (short term funding) constraints for European banks. Officially, the ECB is definitely NOT monetizing sovereign debt, but in practice (in our view) the LTRO is a backdoor way to accomplish exactly that goal. When trying to figure out the true intentions of a central bank, the golden rule is “Don’t listen to what they say – just watch what they do”. So in that spirit, let’s ignore anything the ECB has said and instead take a look at what they are actually doing.

…

Mission Impossible

The month of September was another month of elevated volatility for global financial markets as credit, currencies, stocks and commodities all reacted wildly to rampant speculation regarding the eventual course of action to be taken in Europe. The Canadian equity market took it on the chin, falling 9% last month as broad weakness in commodities dragged the index lower. Both oil and gold dropped over 11% during the month, driven by fears of a global economic slowdown and the closing of speculative long positions. Equity markets south of the border fared better as the safe haven status of the U.S. created global buying interest in their bonds, stocks and currency. The S&P 500 declined over 7% last month in U.S. dollars, but this was almost entirely offset by a 7% strengthening in the U.S. dollar relative to the Loonie. Not surprisingly, the euro also declined 7%, but remarkably, is actually higher year to date relative to the U.S. dollar by about 3%. Government bond yields in the U.S. and Canada plummeted to new lows,reflecting heightened fears over a new global banking crisis. The 10 year U.S. Treasury fell well below 2%, yielding just 1.8% at one point last month. Corporate bonds fared less well as spreads widened reflecting the dramatic move lower in government bond yields and heightened fears over credit risk from a potential double dip recession.

Fear of Fear Itself

“The only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
– Franklin D. Roosevelt from his 1933 Inaugural Address

Almost eighty years ago, a newly elected President of the United States, Franklin Delano Roosevelt, took the stage to give his Inaugural Address. The nation was just over 3 years removed from an unprecedented (at that time) stock market and banking system collapse, millions of Americans were unemployed, a precipitous decline in housing had vaporized the wealth of families, foreclosures had skyrocketed and business confidence evaporated. Federal, state and local budgets were under immense pressure as tax revenue declined and markets had lost trust in the currency. Sound familiar? To be sure, the situation then was much more difficult than what we face today. Poor policy choices by the previous Hoover administration are widely believed to have exacerbated an already very bad situation. By the time FDR took office in 1933, the U.S. economy had suffered three straight years of cascading economic decline with real GDP down by 25% over that period. There was an overwhelming malaise hanging over virtually everyone’s expectations for the future. It appeared hopeless.

…

Dumb and Dumber

Global financial markets continue to undergo wild gyrations as politicians on both sides of the Atlantic appear intent on doing their very best to make bad situations in the E.U and U.S. even worse.As to which group is “Dumb” and which is “Dumber”, I’ll leave it up to you to decide . In my opinion, it is pretty much a dead heat between the two. The U.S. debt debate is playing out (at least so far) pretty much as we expected. The first deadline for agreeing to raise the debt ceiling back in May was ignored, causing the U.S. Treasury to come up with some account juggling in order to extend the timeline for an agreement to August 2nd, 2011. Incredibly, with only 2 weeks to go until the Government of the United States is forced to start choosing which bills not to pay, both parties are sticking to their ideological ground and remain almost as far apart as when they started negotiations 4 months ago. That, in our view, is just plain dumb. Meanwhile in Europe, markets have now waited over 18 months to hear how the EU will deal with the obvious insolvency of an EU member state – Greece. While the politicians have bickered and dithered for more than a year over how to handle the grass fire on the back lawn (Greece), the front lawn (Portugal), garage (Spain) and now the main house (Italy) have all caught fire. This in our opinion was also pretty dumb, and unless the U.S. surprises us, will probably ultimately be viewed as actually being even “Dumber” than what has occurred in Washington.

…

Even Better than the Real Thing?

Markets finally took notice last month of the myriad of risk factors which have been looming on the investment horizon and reacted in a predictable fashion: equity markets and bond yields declined while the U.S. dollar strengthened. The S&P 500 dropped by 1.4% last month but actually climbed 1% in Canadian dollar terms as the U.S. dollar strengthened by almost 2.5% relative to the Canadian dollar. The U.S. equity market finished May up about 7% so far this year in U.S. dollar terms but up only 3.8% for 2011 when measured in Canadian dollars. The Canadian Equity market was led lower by a substantial decline in the price of crude oil (down 10% during May) and dropped for a third consecutive month, falling a further 1% from its April close. May’s decline lowered the year to date return for the TSX index to 2.7%. The stronger U.S. dollar translated into a lower gold price last month (down 1.7%); although the yellow metal is still up over 8% from where it started 2011.

The Usual Suspects

Global markets were fairly mixed over the course of April as the U.S. dollar continued to lose ground against most other currencies. The U.S. equity market had another good month in U.S. dollar terms (the S&P 500 was up 2.8% for April) but was only mildly positive in Canadian dollars (up just 0.3%) as the loonie rallied a further 2.5% relative to the U.S. dollar. The Canadian equity market declined for the second month in a row, dropping 1.2% in April following the modest 0.1% drop in March. The Canadian market was pulled lower by its three largest groups: Financials, Energy and Materials – all of which declined in April. Energy was particularly interesting as the price of oil climbed over 6%, while oil exploration and production stocks fell. Fortunately, we have positioned the energy holdings of our clients’ capital appreciation accounts much more heavily toward energy service stocks, which gained in value during April.

…