As we enter 2011, the global economic situation and markets continue to improve. Major stock indices performed well in the fourth quarter of 2010, buoyed by continued optimism in the world economic recovery. The S&P/TSX Composite Index returned 9.4% over the quarter, while the year 2010 returned 16.3%. Boosted by higher natural resource prices, the Canadian small-cap index gained 17.3% over three months and returned 34.7% during the 12 month period. The US based S&P 500 Index gained 13.1% over quarter, and returned 10.0% in 2010.
Unprecedented amounts of fiscal and monetary stimuli started and sustained the upswing, and the passage of time has allowed a great deal of healing from the events of 2008-2009. Recent U.S. economic data releases have dampened fears of a fallback into recession. Europe, despite a banking crisis, is posting solid data in its core economies. Across the Pacific, excluding Japan, Asia and the emerging world continue to pump out gains well in excess of the largest developed economies. The business cycle upswing that began in the spring of 2009 is sustaining itself, gaining strength from a new round of quantitative easing, a slowly improving jobs market, and growing incomes and profits.
As always, this is not to say that the picture is entirely rosy. In the developed West, current account deficits, as well as debt and deficits continue to pose major challenges. Canada got off relatively easily during the recession, but other wealthy nations have not fared as well. Although the feared economic catastrophe has clearly now been averted, countries such as the United States, among other nations, must now find the heart and stomach to balance their budgets and make do with less, as they cannot go on borrowing forever. In the United States the Democrats recently took a "shellacking" (as Obama himself put it) at the hands of the GOP. The recent result of the mid-term elections is going to force bipartisanship cooperation, to "fix" what the perennially negative media has dubbed a "broken" America. Although it will be politically difficult and won't come without sacrifice, it can be done. For example, one only has to look back to the 1990s when with a divided government under Bill Clinton's presidency and following horrible economic times in the 1980s, the US economy entered one of its most prosperous eras in history.
Here in Canada, by many measures the respective recessions of the 1980s and 1990s were longer and more severe than was the recession of 2008-2009. Stricter regulation of our financial system and a toned down version of laissez-faire capitalism have enabled Canada to emerge stronger and more quickly from the recession than many other nations; our share prices reflect this. Despite the doom and gloom talked about in the media in the depths of the recession, the markets have continued to reward long term investors. For example, consider some of our top balanced funds which have averaged a 10% return over the past decade, notwithstanding the market crash of 2008-2009 during this 10 year period. As always, those who invest for the long term and with professional advice continue to be rewarded.
As always, please feel free to call me at 604-688-5262 anytime.
All the Best,
Anthony Ciccone, B.Comm.
Global financial markets were highly volatile in the third quarter of 2011. The MCSI world index was down 16%, while the S&P 500 index in the US was down almost 14%. The commodity-laden Canadian market was down 12% as resource prices came under pressure, with the notable exception of gold. However, it should be noted that since the beginning of October all of the major indices have staged impressive rallies.
As has been the case for some time, the primary factor affecting investor sentiment remains sovereign debt. Although the US debt ceiling issue was resolved, a continuing lack of a coherent solution to what looks like an increasingly likely default in Greece has led investors to once again seek safe havens. Government and investment grade bonds, gold, and the US dollar all experienced significant gains over the quarter. Gold reached an all time nominal high of almost $1,900 per ounce in August, while in comparison to the US dollar the Canadian dollar fell from well above parity at the beginning of the quarter, to well below parity by the end. Fixed income investments also out-performed equities, as is the rule of thumb in an environment of mixed sentiment and uncertainty.
Like his global peers, Finance Minister Jim Flaherty has been vocally critical of Europe’s inaction regarding the situation in Greece. He’s publicly stated that self-interest and political motivation must not trump practicality and the common good. He’s warned that Canada is not an island, and should the crisis in Europe not be resolved, that Canada, like the rest of the world, will be affected. Ironically, the ancient Greek philosopher, Aesorp may have summed it up best; “After all is said and done, there is more said than done.” If all of this sounds eerily familiar it’s because it is; the crisis in Europe and the debt ceiling crisis in the US over the summer share much in common. Both problems were largely precipitated by politicians and both problems depressed the stock markets well ahead of their respective climaxes. Hopefully, both problems prove resolvable.
Notwithstanding today’s sovereign debt issues, current economic conditions bear little resemblance to the conditions observed during the credit crisis of 2008. Credit is readily available spurring merger and acquisition activity, corporate balance sheets are strong, jobs are being created, and interest rates and inflation remain low. This translates into profits for investors and good news for the economy; historically speaking, current conditions are hardly a precursor to recession.
As always, we continue to invest in the markets for the long term as it’s a tried, tested and true strategy that continues to produce results. We offer our clients a full suite of investment products and find the best possible investment opportunities based on each individual’s risk tolerance and goals. Please feel free to contact us for a complimentary review of your investments, or recommendations as to how we may be able to assist you in meeting your investment goals.
All the Best,
Anthony Ciccone, B.Comm., CHFC
P.S. Please find enclosed your copy of Solutions Magazine. With 14 million Canadians expected to retire over the next 20 years, I’d suggest you take a look at the article on page 4 entitled “Retire your worries” for strategies on how to guarantee an income in retirement regardless of market conditions.
For the quarter, The TSX was down 5.2%, while the US benchmark was up 0.1%. Year to date, The TSX was virtually flat at the end of the second quarter, while the US benchmark was up 6%.
Sovereign debt is once again in the headlines as nations struggle to balance their budgets. In Europe, additional aid for Greece has reduced the threat of a default by Athens. However, further cooperation between Europe’s governments will be required to avert the possibility of Greek bankruptcy. Politics in Athens will make it difficult for The Greek government to agree to further austerity. In Northern Europe, politicians are also coming under increasing pressure as their citizens demand to know why they should pay for other Nation’s blunders. The banking system could likely withstand a default by tiny Greece, which only makes up 2.5% of The EU economy. However, the fear is that Greece could be the domino that causes Spain or even Italy to fall. Additional compromise and likely a restructuring of Greek debt that will force creditors to absorb some losses, is needed to stave off major problems for The EU that have thus far been avoided.
Partisan bickering in Washington has investors worried that The US may default on its obligations. This is at least as much a political as an economical problem. The Americans have a greater capacity to repay than do The Greeks, due to a smaller relative debt, an independent monetary policy, and more favorable demographics. Nonetheless, if congress, the senate and the White House do not agree to at least an interim solution to increase the debt ceiling through the 2012 election, than a default is possible. Infighting within The GOP itself between The Tea Party and more moderate Republicans is making a compromise with The Democrats problematic; if a compromise is not reached soon the markets (and probably the electorate) will punish Lawmakers in Washington. However, a default surely can be avoided as The US was more indebted after World War II than now and they still managed to retain their position as the world’s dominant and largest economy. If politicians could only do what they were elected to do, responsibly govern, than there is no reason that The US cannot avoid insolvency.
Although Canadian markets have recently been outperformed by The US, we remain in a better position overall. Our debt issues are less problematic and Asian economies continue to experience robust growth (China expanded at an average rate of 9.5% over the past year) driving demand for our natural resources. Notwithstanding this, if the aforementioned global debt issues are not dealt with we will also be affected. Notably, debt issues may cause bond yields to soar as investors demand higher yields to compensate for additional risk; this in turn could drastically drive up the cost of borrowing for consumers.
Despite a lackluster quarter, The TSX is still up more than 60% from the depth of the credit crisis. As always, those who remain invested in the markets continue to be rewarded over the long term.
All the Best,
Anthony Ciccone, B.Comm.
P.S. - With the threat of increasing interest rates in the near future this may be a good time to review your mortgage.
To say that the first quarter of 2011 was eventful is an understatement of seismic proportions. In Japan, an earthquake occurred that has only been rivaled in strength three times since the dawn of the 20th century. The quake spawned an enormous tsunami, causing what many fear may prove to be a terrible nuclear accident. Geopolitically, a figurative tsunami has been sweeping the Middle East in the form of violent revolts against despots, one of whom has held absolute power since Richard Nixon was President. To boot, it looks increasingly likely that NATO and the West, led by the US if not literally but certainly militarily, have become embroiled in yet another regional war.
So how have investors fared in the midst of these significant events? Contrary to what may seem intuitive after reading the headlines, the major North American indices posted stellar gains this quarter. The DOW Jones was up 6.4% for the quarter, while our Canadian benchmark, the TSX Composite, was up 5.3%. Remember, these are only the gains over a three month period; annualized, both indices returned more than 20%. How is this possible in light of recent current events?
The disaster in Japan has caused tremendous loss of life and destruction, and it is devastating to see these images on the news. However, from a Canadian investor's standpoint this event will not have major implications for one's portfolio. Investment opportunities in Japan have not been attractive for many years and overall, we’ve avoided investing in that part of the world. Although a large economy, Japan represents only 9% of total world GDP. North Eastern Japan where the quake occurred represents less than 10% of the Japanese economy; in total less than 1% of the world economy was severely affected. The global recovery is not jeopardized by this disaster.
As for geopolitical turmoil in the Middle East, any student of history knows that rather than the exception, this is the unfortunate norm in this region. There have been countless wars fought in this tumultuous, oil rich area. Israel alone has fought half a dozen wars against its neighbors since 1947, Iran and Iraq fought a violent eight year war in the 1980s, and even now there are ongoing wars in both Iraq and Afghanistan. Certainly all this affects the price of oil; today it sits at $110 per barrel. However, supply and demand and regional wars have affected crude prices for decades and this is nothing new. We must also remember that relatively speaking, a Canadian Balanced Portfolio is highly over-weighted in the energy sector; although high oil prices may be a bane for some, they are a boon for others.
Recent performance, notwithstanding events described above, adds further credence to our strategy of investing for the long term and with professional management. In conjunction with our fund managers, we continue to find solutions for investors with a variety of objectives, whether that be growth through a commodity based mutual fund, providing an income in retirement or attaining tax effective returns in the form of capital gains or dividends. As always, please feel free to contact us at (604) 688-5262 to discuss your portfolio.
All the Best,
Anthony Ciccone, B.Comm.