Year End Review North American Capital Appreciation Strategy December 2014

The fourth quarter did not start off well for the markets. By mid October, both the S&P500 and TSX were down over 7% and 11% from their respective all time highs reached in mid-September 2014. The trigger seemed to be many factors including weaker retail sales in the U.S., weak economic data from Europe and the end of quantitative easing (QE), the U.S. Federal Reserve (Fed) large-scale bond buying program that helped fuel equity markets over the past 5 years. An accelerated sell-off in oil triggering a sudden and significant widening in bond high yield spreads, which has often been an indicator of tougher markets ahead, probably created an additional layer of panic in the market. Once the market adjusted to the fact that the pain in the high yield market was mostly centered on energy companies, which make up about 17% of it, things began to normalize. Then on October 15th, comments by James Bullard, president of the St. Louis Federal Reserve Board, suggested delaying the end of the Fed’s bond buying program and in fact possibly extending it with a new program, sparked a rally in the S&P500. This seemed to be a powerful enough signal to the markets that the Fed would remain accommodative in the face of further volatility notwithstanding its original goal to end QE in October. The TSX initially recovered as well but further pressure from declining crude oil prices reversed these gains. During the fourth quarter the TSX returned -1.5% in C$ while the S&P500 returned +4.9% in US$. Adjusting for currency moves, the S&P500 returned 8.6% as the C$ depreciated slightly more than 3 cents relative to the US$, closing at US $0.86 at December 31st.

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