July 8th, 2013

Strategy Review

The S&P 500 continued its advance through April and May hitting an all time high on May 22nd of 1,687, before pulling back almost 8% to the June low of 1,560 and eventually closing at 1,606 on June 30th. The second quarter started out on a positive note driven by better than expected first quarter earnings. In fact, 70% of companies reporting first quarter earnings inApril and May beat expectations with the blended earnings growth rate for the quarter coming in at +3.3% as compared to -0.7% estimated at March 31st . All ten sectors of the S&P 500 showed earnings growth during the first quarter.The positive market momentum inApril and most of May was also supported by strong economic data including better than expected auto sales, improving jobless claims and overall much stronger consumer confidence. On May 22nd, Fed Chairman Ben Bernanke indicated in his first testimony before Congress since February, that while the economy has shifted to a more sustainable growth trajectory, the employment picture still remains weak overall.This seemed to suggest status quo in terms of quantitative easing. However, the minutes from the Federal Reserve’s policy meeting released that afternoon, indicated some Fed members were in favour of tapering the central bank’s $85-billion-per-month bond-buying stimulus program as early as June. This mixed message resulted in the sell-off in equities and an increase in bond yields. Weaker manufacturing data out of China and concern about a possible credit crunch also weighed on markets globally. The June 19 Fed meeting caused a further downdraft for the S&P 500 as the Fed confirmed it may moderate its pace of bond purchases towards the end of the year and completely stop by mid-2014. The total return for the S&P 500 in the second quarter was +2.9% in US$ or +6.5% in C$ as a result of a weaker Canadian dollar.