April 5th, 2013

Strategy Review

The S&P 500 started 2013 with the biggest one day gain in more than a year as investors welcomed a budget agreement that averted the “fiscal cliff”.The strong performance continued right through the first quarter. Not even concerns over the Italian election results, in which Italy has not yet formed a coalition government or costs associated with quantitative easing which have raised worries that the Fed stimulus could end sooner than expected, were enough to curb market enthusiasm through the end of February. In March, the focus shifted back to the Eurozone as the European Central Bank (ECB), European Commission, International Monetary Fund (IMF) and the Cypriot Parliament worked to finalize a €10 billion Cyprus bank bailout that would see shareholders, creditors and uninsured deposit holders cover much of the cost. The main concern in the market was the possibility that this may be considered a template for future bailouts, which could derail the fragile and nascent Eurozone recovery. None of this in itself was enough to slow the market momentum as the total return forthe S&P 500 in the first quarter was 10.6% in US $ or 13.0% in C$ as a result of a weaker Canadian dollar in the quarter. The first quarter was all about fund flows as liquidity poured into U.S. equities at about the fastest rate we have seen since 2007. Positive housing and jobs data in recent months have only added fuel and not even the sequestration cuts that began in March have had much impact on market momentum. The S&P 500 closed the quarter at its all time high surpassing its October 2007 peak. In contrast to the S&P500, the total return for the S&P/TSX was 3.3% or about one quarter the performance of the S&P 500. Performance in Canada continues to remain hindered by the underperformance of the heavily weighted materials index. A combination of poor operating performance in mining and disappointing commodity pricing has held back the Canadian market year to date. During the quarter, pricing pressure continued to mount on the price of gold and copper with gold closing at US$1598.75 per ounce, down 4.6% in the quarter and copper, down 4.9% at US$3.42 per pound. Below-normal temperatures across most of the United States helped oil and natural gas prices as oil closed up 4.4% at US$97.23 per barrel while natural gas increased 20.0% to close at a 52-week high US$4.02 per mcf.