THIRD QUARTER 2017 RETROSPECTIVE AND PROSPECTIVE – Ten Years Later

THIRD QUARTER 2017 RETROSPECTIVE AND PROSPECTIVE

Ten Years Later

In economics, things take longer than you think they will, and then they happen faster than you thought they could.”- Rudiger Dornbusch

It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007. The Canadian market continued its upward trajectory into the following year peaking in June as energy stocks were buoyed by high oil prices. While the bull market leading up to 2008 had duration of about five years, the current bull market has gone on for ten years without any significant setback.

financial crisis US S&P 500

It has been ten years since the great financial crisis. In the US, the S&P 500 peaked on October 9, 2007.

Global stock markets generally continued their upward bias in the third quarter of 2017. The US market gained 4.5% as measured by the S&P 500 Total Return Index in US dollars. A strong Canadian dollar had the effect of subduing that return to 0.5% when expressed in Canadian currency. With the exception of Spain and the UK, European markets were positive. Asian markets were very strong in US dollar terms with the Hong Kong market up 6.9% and China’s market up 4.9%. The Japanese market was pulled into positive territory by a very strong September (up 3.6%) bringing the quarter to 1.6%. Resource heavy markets such as those of Latin America, Australia and Canada improved as commodity prices generally improved. The Toronto Stock Exchange recorded an advance of 3.7% led by Energy (5.7%), Consumer Discretionary (4.2%) and Financials (3.7%).

             Canadian Dollar             US Dollar
Q1 Q2 Q3 Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 2.4% -1.6% 3.7% 4.4%
S&P 500 5.0% 0.4% 0.5% 5.9% 6.1% 3.1% 4.5% 14.2%
MSCI EAFE* 5.4% 2.3% 0.8% 8.7% 6.5% 5.0% 4.8% 17.2%
91 Day T-Bill 0.1% 0.1% 0.1% 0.3%
CUBI** 1.2% 1.1% -1.8% 0.5%
CDN/US dollar 0.8% 2.5% 4.0% 7.6%

* Europe, Asia and Far East Index

** Canadian Universe Bond Index

Global economic growth continues to strengthen in both the developed and emerging economies although at subpar levels compared with traditional recoveries. As central banks have cautiously raised interest rates, bond prices have come under pressure. Wage demands in the developed countries have not accelerated as inflationary expectations have remained low and productivity improvements have been driven by technology. In this environment, central banks may temper their enthusiasm to normalize interest rates and reduce their bloated balance sheets. Both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) are forecasting modestly better growth in 2018.

Among the advanced economies, Canada has posted strong growth primarily due to higher commodity prices. The Canadian dollar has appreciated against other currencies as our interest rates have gone up faster than other countries. This strength in the Canadian dollar has served to lower the returns from foreign investments.

In this environment, stock markets have continued to advance. The S&P 500 in the US has hit new highs surpassing levels from before the economic crisis. Valuation levels have also hit high levels making the search for new investment ideas challenging. Overall, we have been taking more profits than reinvesting funds, causing cash levels to increase.

A number of factors could come into play that would precipitate a more meaningful market correction than we have seen in the last ten years.

Foremost in Canadian concerns has been the resumption of NAFTA negotiations. Since the Brexit vote and the start of the Trump presidency, a backlash against global free trade has been evident, causing uncertainty in the business community, thus dampening the appetite for capital investment.

Other geopolitical factors are also of concern. North Korea’s nuclear threat and heightened discord with the US has been very prominent in the headlines as have tensions in the Middle East, Venezuela, Spain, Russia and the Ukraine. Monetary concerns in Greece, Italy, Spain and Portugal have not gone away.

Technology is also having an increasing impact on businesses and consumers. Disruptions in the retail trade are changing the way supply and delivery systems operate. The hotel and taxi industries are threatened by innovations such as Uber and AirBnB. Financial technology is changing traditional banking. Artificial Intelligence (AI) threatens to cause massive changes in employment.

Demographics are also going to have an affect on employment and retirement as well as government finances. As the population ages, the growing shortfalls in funding for health care and pensions will become critical.

All of these factors lead us to exercise caution and prudence in our investment practices. We will continue to scour for well financed, well managed and reasonably priced companies in which to place our funds.

THIRD QUARTER 2017 FIXED INCOME COMENTARY

“Be thankful we’re not getting all the government we’re paying for!” ~ Will Rogers

Fixed income markets have started to react to the shifting winds of interest rate policies. With two rate hikes so far this year and indications that the Federal Reserve will be slowly unwinding its quantitative easing program, the trend seems to be firmly in the tightening mode. In light of this, markets are now considering the increasing likelihood of one more hike in December by the Federal Reserve.

As we have stated in the past, much depends on economic variables both domestic and international. Similarly, the potential impact of geopolitical events can have outsized shock effects on markets.

While President Trump has not been much of a supporter of Chairman Yellen, whose term expires in January 2018, it may well be that a steady hand at the tiller will win the day. As Vice Chair Stanley Fischer has recently resigned due to personal reasons, there are now two other vacancies in the Reserve. Filling the Board to its full complement in a short period with members who may not be as well known in the markets, could cause turbulence.

In Canada, Governor Poloz’s seven year term has three more years to run. Influences on his decision making may well be coming from domestic economic factors which may be heavily influenced by the impact of changing trade agreements and taxation policies.

The situation in Europe remains unclear. Chancellor Merkel’s majority has been significantly reduced by the ascendancy of the nationalist AfD party. Their ascendancy may not directly affect her ability to form a government; however it will influence her political decision making going forward. Increased caution will likely be the German approach to a number of vexing European issues.

The enormity of the Brexit project is starting to sink in and indications are surfacing that there may not be enough time for an orderly negotiated divorce. The spectre of a disorderly breakup is definitely focusing the attention of various financial institutions and international corporations who are making their own alternative plans in the absence of a clear direction from officials.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the third quarter was a decline of 1.8%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield increased by 0.35% over the course of the quarter to end with a yield of 2.1%. During the third quarter the Canadian dollar appreciated by 3 cents from 77.1 cents US to 80.1 cents US.

You can view and download a copy of our market commentary here:

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We believe that successful investors focus on the quality of the assets they buy. Speculators focus on guessing the future prices. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

 

FIRST QUARTER 2017 FIXED INCOME COMMENTARY

Fixed Income Commentary – First Quarter 2017

“Globalization is the process by which markets integrate worldwide.” ~ Michael Spence

If the first quarter is a harbinger of political turbulence to come, then we are looking forward to interesting times! The Trump presidency has had a rocky start with changes in tack regarding appointments and implementation of promised reforms. While new administrations do tend to have their challenges as they settle into their roles, the Trump administration seems to have had more than their share. It can only be hoped that they will find their "sea legs" soon.

Market sentiment wavered realization Trump campaign promises

Market sentiment has wavered with the realization that not all of Trump’s campaign promises are likely to be delivered. (DoD photo by U.S. Marine Corps Lance Cpl. Cristian L. Ricardo)

Market sentiment has wavered with the realization that not all of Trump’s campaign promises are likely to be delivered. (DoD photo by U.S. Marine Corps Lance Cpl. Cristian L. Ricardo)[/caption]While the chaos swirling around the White House continues, the Federal Reserve (Fed) has finally pulled the trigger on the expected rate hike in the first quarter, likely the first of a number. The President may not be a fan of Chairman Yellen, however having a sober, low key person in charge at the Fed provides some assurance to investors that there is some continuity in policies that are being carried out.

The US government's large spending program is likely to be inflationary. During a period  when economic growth and labour markets have continued to firm, this growth will give the Fed ample reason to continue their rate hike program. As the Fed has stated, any action will continue to depend on subsequent economic readings.

Foreign buyers in turn have been scaling back their purchases of US Treasury securities as the expected rate hikes and the potentially inflationary actions of the government are likely to put pressure on bond prices.

Major questions remain regarding Europe. The combination of upcoming elections in France and Germany, terrorist attacks and growth in populist political movements all add to the uncertainty. As we have stated in the past, there continue to be overhanging issues, primarily related to debt and borrowing in various countries. Political uncertainty regarding the future of the European Union and the consequent stability of the Euro will make investors that much more reluctant to participate in various refinancing attempts. Weakening of the Union and any further departures along the lines of Brexit would only increase the pressure on Germany to act as a backstop to the Euro denominated debt; a situation that will have its limits!

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the first quarter was an increase of 1.2%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield declined 0.09% over the course of the quarter to end with a 1.63% yield at quarter-end. Over the course of the quarter the Canadian dollar appreciated by 0.7 cents from 74.5 cents US to 75.2 cents US.

You can view and download our complete quarterly commentary here:

What is Successful Investing? Learn more here>>

Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains here>>

We believe that successful investors focus on the quality of the assets they buy. Speculators focus on guessing the future prices. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.  

INTEREST RATES AND BONDS – 4TH QUARTER 2016 FIXED INCOME COMMENTARY

“Last year we said, 'Things can't go on like this', and they didn't, they got worse.” ~ Will Rogers

Interest Rates and Bonds: After peaking in the summer, the bond market’s direction has decidedly deteriorated. In December the US Federal Reserve started its widely expected tightening by raising the Fed Funds rate 0.25% to 0.50%. Further interest rate hikes will likely proceed at a moderate pace as dictated by economic conditions. According to the commentary emanating from Federal Reserve governors and other pundits indicates that the consensus view is that historical interest rate lows are behind us.

interest rates bond market direction deterioated

Interest Rates and Bonds – After peaking in the summer, the bond market’s direction has decidedly deteriorated.

Mr. Trump's unexpected election win is causing some uncertainty as to the economic agenda going forward. His promises of corporate and personal tax cuts, increased military spending and infrastructure investment will have to be funded through increased borrowing that would normally be expected to be inflationary. In addition, his penchant for random Tweeting has, and will likely continue to cause, turbulence in the markets.

European concerns continue. The Italian banks' need for recapitalization, the most notable being the insolvent Banca Monte Paschi di Siena (the world's oldest and Italy's third largest bank), has called into question the viability of the entire Italian banking system. As it stands, approximately 18% of Italian banks' loan portfolio is non-performing.

Italy’s problems dwarf those of Greece. Italy is the third largest economy in Europe. A banking crisis in Italy will require all the resources of the European Union. The strapped Italian government simply does not have the resources to recapitalize some, or all, of its banking sector. Questions as to the continued viability of the European Union are multiplying.

In 2017 elections will be taking place both in France and Germany. These two countries have been traumatized by terrorist attacks and they have been severely impacted by the immigration crisis. Nationalist sentiment and anti-immigrant rhetoric have exacerbated tensions.

Indications are that Canadian government borrowing and deficit spending will be of longer duration that originally indicated. Increased borrowing and similar spending policies in the US should keep the interest rate differentials, and hence the exchange rates, between the two countries in a relatively tight range, unless Mr. Trump's policies result in significantly increased economic growth and job creation in that country.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index for the fourth quarter was a decline of 3.4%. 91-day Treasury bills returned 0.1% over the same period. The benchmark ten-year Government of Canada bond yield increased 0.72% over the course of the quarter to end with a 1.72% yield at year-end. Over the course of the quarter the Canadian dollar depreciated by 1.7 cents from 76.2 cents US to 74.5 cents US.

What is Successful Investing? Learn more here>>

Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains here>>

We believe that successful investors focus on the quality of the assets they buy. Speculators focus on guessing the future prices. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.  

 

Market Outlook – THIRD QUARTER 2016 RETROSPECTIVE AND PROSPECTIVE

Market Outlook – And The Band Played On…

“When democratic governments create economic calamity, free markets get the blame.”-Jack Kemp

“Politicians and diapers must be changed often, and for the same reason.”– Mark Twain

Thus far, the calamities predicted by the pundits that would result from the Brexit vote to leave the European Union have not been as severe as anticipated. Perhaps this is due to the building geopolitical and economic stresses that have diverted the focus from Brexit to other issues. Furthermore, the impact of Brexit will likely take some time to discern as the trade, migration, political and other ramifications evolve over the coming months and years. Meanwhile, governments globally continue in their efforts to stimulate economic growth with what appears to be diminishing results.

The Canadian stock market continued its advance for the year as the S&P/TSX Index increased 5.5% for the quarter bringing the year to date return to 15.8%. Information Technology was the leading sector up 12.2% in the quarter followed by Industrials (10.8%), Health Care (9.0%) and Consumer Discretionary (8.9%). Only Real Estate (-1.5%) and Materials (-1.1%) recorded negative results. The US market was less robust as the S&P 500 advanced 3.9% in the quarter while the Dow Jones Industrial Average recorded a 2.8% gain.

 Canadian Dollar

              US Dollar

Q1

Q2

Q3

Q4 YTD Q1 Q2 Q3 Q4 YTD
Toronto Stock Exchange 4.5% 5.1% 5.5% 15.8%
S&P 500 -4.7% 1.9% 5.4% 2.2% 1.3% 2.5% 3.9% 7.8%
MSCI EAFE* -9.5% -3.2% 7.3% -6.0% -3.7% -2.6% 5.8% -0.8%
91 Day T-Bill 0.1% 0.1% 0.1% 0.4%
CUBI** 1.4% 2.6% 1.2% 5.3%
CDN/US dollar 6.7% -0.3% -0.8% 5.5%

* Europe, Asia and Far East Index

** Canadian Bond Universe Index

 We head into the final quarter of 2016 with some trepidation. Many parts of the world are experiencing political and economic uncertainty. For the most part, stock markets have exhibited great resiliency in the face of anaemic economic growth, rising protectionist sentiment and increasing regulatory constraints.

Clinton Trump Election fever US voters presidential candidate dislike

Election fever will dominate the news as US voters attempt to decide which
presidential candidate they dislike the least

In the US, election fever will dominate the news as the voters attempt to decide which presidential candidate they dislike the least. Investors will continue to look for evidence of a strengthening economy as growth continues to be lacklustre despite relatively positive trends in employment and housing prices. It is interesting to note that despite a short rally in September following the Federal Reserve’s decision to leave interest rates unchanged, the Dow Jones Industrial Average was down 0.4% for the month. Investors continue to be concerned over declining corporate earnings that have been evident over the past six quarters in an economy that is exhibiting growth below potential. Earning per share have increased largely as a result of massive share buy backs and dividend increases that have been delivered at the expense of lower capital investment.

Europe is dealing with more problems than just the aftershocks of Brexit. The ongoing migration crisis continues to bolster extremist political rhetoric while the underlying financial instability of the European banking system continues unabated. The most recent shock has come from Germany, which up until now has been the economic engine of Europe. The US has levied a fine of US$14 billion against Deutsche Bank for its participation in selling mortgage-backed securities in the US in 2008. A fine of that size would be close to the bank’s total market capitalization of US$18 billion while expectations are for a settlement in excess of US$5 billion. The failure of Deutsche Bank would have the potential to be very destabilizing to the world’s financial system. Deutsche Bank has the second largest derivative exposure in the world after JP Morgan. As the Bank’s creditors and depositors concerns grow, it remains to be seen if a bailout or refinancing will be forthcoming.

In Eurasia, the Russian economy continues to deteriorate under the pressure of low energy prices. The Russian response has been to exhibit bravado in the Ukraine and the Middle East, particularly in Syria. Whether these actions are anything more than posturing remains to be seen but tensions with the US and its allies are escalating.  China continues to exhibit hegemony in the South China Seas to the chagrin of neighbouring states. The US has responded with stationing a naval presence in the area only to have Chinese aircraft fly by in close proximity. North Korea continues to build on its nuclear energy program much to the entire world’s consternation. These demonstrations add to geopolitical tensions even if they turn out to be mere sabre rattling.

Since 2008, the global central banks have intervened in the economy through maintaining low interest rates in their efforts to stimulate economic growth and spending. In this environment, asset prices have been bid up on the back of easy money and debt, both in the public and private sectors. The build up of debt, much of it at negative interest rates, has reached proportions that make the contemplation of higher rates ever more alarming. Low rates used to be a sign that investors were less risk averse whereas now they appear to reflect an insurance premium paid to park money for a period. With or without productivity growth, lenders will want to be compensated at some point and governments will be forced to curtail their voracious spending appetite.

More worrisome is the propensity of politicians to exploit unrest in the electorate by blaming business, free trade and globalization for their plight. Trust must be fostered in the economies in order to promote investment, job creation and economic growth. The enabling of barriers to trade will do little to engender greater trust and investment.

Longer term, technology will continue to generate great opportunities and great dislocations. Rapid technological advances that are reshaping media, retailing, manufacturing, and administration and service delivery are impacting whole industries. These changes will cause greater stress as the skills required for employment evolve and leave many people behind. At the same time, the faster speed and volume of business will foster economic growth and prosperity.

The emerging economies are lifting vast numbers of people out of poverty into middle and upper class consuming environments. Aging populations in the developed world are putting greater pressure on health care and service delivery as lifestyles and consumption habits evolve.

So, despite our near term trepidation we think that investors will have many opportunities. It is through these periods of greater uncertainty and disequilibrium that our efforts will be directed towards identifying investments to enhance portfolio profiles towards meeting investors’ goals and objectives.

You and view and download our third quarter commentary here:

What is Successful Investing? Learn more here>>

Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains here>>

We believe that successful investors focus on the quality of the assets they buy. Speculators focus on guessing the future prices. Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

 

BOND MARKET – FIRST QUARTER 2014 FIXED INCOME COMMENTARY

 Bond Market – “There are two fools in every market: one asks too little, one asks too much.” – Russian proverb

After the lacklustre performance of the bond market in 2013, where the Canadian market lost 1.2%, the first quarter saw a turnaround with the market making up for more than the whole previous year’s loss in less than a month.

However all is not as it seems. Much of the rally can be ascribed to external factors. Wobbles in emerging markets combined with political uncertainty developing in the Ukraine and Crimea resulted in the usual flight to quality trade which provided a boost to North American bond markets.

Bond Market Fed Chair Janet Yellen QE taper

Bond Market – New Fed Chair, Janet Yellen – vote to continue QE ‘taper’.

Despite these external factors, which did not even rate a mention in the news release, the January Federal Reserve Open Market Committee (FOMC) meeting concluded with a unanimous vote for a continuation of a reduction in asset purchases, the now well known “taper”.  Similarly, reference to economic factors was largely positive, a message that overall would argue for higher rates in the longer run.

The start of the Yellen era after her recent confirmation as the new Chair of the Federal Reserve started with the higher than usual degree of parsing of her comments subsequent to the March FOMC meeting. A new Chair’s initial comments are traditionally dissected to a higher than usual degree in order to try to glean insights into their views.

Her comments regarding the reduction in the Fed’s ongoing purchase of securities and the likely increase in interest rates were by no means news. Nevertheless, the markets’ eagle eye focused on her words that interest rates may be rising six months after the asset purchases have been phased out. While in its essence this wasn’t news, however the indication of the defined “six months” sent the market for a tumble.

In our view this microscopic parsing of statements, while par for the course, is missing the point. The Yellen era is unlikely to bring fundamental change to the policy direction of the Federal Reserve. Having said this, the likely direction of interest rates is upwards, depending, as we had said before, on external factors, be they economic or geopolitical.

The total return performance of the bond market as measured by the DEX Universe Index for the first quarter was an increase of 2.8%. The benchmark ten-year Government of Canada bond yield decreased by 0.3%, to 2.5%.

Continue to our equity market commentary here>>

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The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.