October 12th, 2012

Strategy Review

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.