January 9th, 2013

Strategy Review

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.