Although negative buzz phrases like fiscal cliff dominated the media near the end of the year, 2012 was a good year for investors. As I write this, both the S&P 500 and Dow Jones are at fresh five year highs. Europe is still intact, the US recovery remains firmly on track, and China’s economy is still growing at an astounding pace. Nearly all major global indices finished 2012 in positive territory. The S&P 500 Index generated a solid 16% gain in 2012primarily due to improving corporate profits in the financial and retail sectors, monetary stimulus from the Federal Reserve, and economic stabilization in Europe. The best performing sectors were real estate and consumer discretionary which boasted returns of 20% and 28% respectively. The worst performing asset classes were commodities and energy, both of which were nearly flat. This helps to explain why the resource-based Canadian market was bested by the US and only returned 4% for the year.
The recovery in the US continues to gain steam. The US housing market which tanked on the eve of the 2007-09 recession has turned around. Steady job creation (unemployment is now at its lowest level in five years) helped the housing sector last year, when it likely added to economic growth for the first time since 2005. US GDP grew at approximately 3.1% which is a very healthy figure for a developed economy. Politicians even did their part, although it was again at the 11th hour, to avert the fiscal cliff. That being said the main challenges that face the US recovery by and large remain political. There is still some danger that Republicans and Democrats will fail to compromise in the best interest of the nation.
Another political development this year was the appointment of Hu Jintao who will serve as the president of China for a 10 year term. It’s expected that under his government the middle class will continue to flourish; the rise of the middle-class in China is mind-boggling. For example, in the decade from 2000-2010 average disposable income in Chinese households quadrupled. This newfound wealth has created a hunger for brand-name North American goods from fried chicken at KFC to pharmaceuticals from Proctor and Gamble. China is now the second largest consumer of luxury goods in the world after the US; this would have been preposterous 20 years ago. China used to be almost exclusively thought of as an agrarian and export based economy but this is no longer the case. To profit from this opportunity, our fund managers are investing in companies with household names here in North America that are well positioned to benefit from a new market that only the US can rival in scale.
Unlike in 2011, fears over the European debt crisis did not temper the market rally of 2012. The worst is likely over and market confidence reflects this. EU leaders seem to realize that they are all in the same proverbial boat and that they will either sink or swim together. That being said, there still remains much to be done as it pertains to political and debt issues in both Europe and the US. However, we have more cause for optimism going into 2013 than we have had in several years as the two largest world economies, the US and China, continue to expand at impressive rates. The global economy is healthier now than it has been in years and there continue to be opportunities for investors to profit. As always, please feel free to contact me for a complimentary review of your portfolio.
All the Best,
Anthony Ciccone, B.Comm., CHFC
PS: At Ciccone/McKay we continue to offer a wide range of investment options. Please contact me at 604-688-5262 or firstname.lastname@example.org if I can assist you with an RRSP contribution. The maximum contribution limit for 2012 is $22,970 and the deadline is March 1st, 2013.
Global markets performed well this quarter, with Toronto and New York up more than 6%. This made up for lackluster performance in the preceding quarter. Central bank intervention and improving fundamentals, particularly in employment, were the most important factors in a positive quarter.
In Canada, the materials and energy sectors led the rally with both sectors posting double digit returns. As they usually do, oil prices rose on increased demand driven by improving global economic health. In the midst of the perception that inflation may rise, investors sought refuge in precious metals, leading to increasing prices in silver and gold. Continuing growth in the US also contributed to a positive quarter. In the US, Ben Bernanke and the Federal Reserve continue to do their part with an active monetary policy that continues to inject money into the economy. This policy of buying bonds to ease liquidity has played a large role in the economic recovery; the stock market reflects this as the DOW is now at its highest level since 2007.
A second term for Obama, Democratic retention of the Senate, and Republican retention of the House of Representatives means that the balance of power in Washington remains unchanged. The three branches of government will need to compromise to get the US fiscal house in order, something which they have thus far been unable to do. The expiration of the Bush and payroll tax cuts, coupled with mandated government spending cuts, will have a significant impact on GDP growth. This is simply the law of supply and demand; higher taxes mean less money is spent to drive the economy. Less government spending also has the same effect. This has been referred to as the looming fiscal cliff. To make matters worse, Republicans insist primarily (some exclusively) on spending cuts whereas Democrats want a combination of tax increases and spending cuts to reduce the deficit. If political compromise is not achieved then we may very well find ourselves in a situation similar to the debt ceiling debacle of 2011. If the rhetoric of both parties is any indication of their unwillingness to compromise, then we could be in for a rocky ride.
In Europe, we are seeing more of the same. The European Central bank has continued to buy up the debt of struggling EU members to stave off a full blown crisis. Whenever a struggling member nation's borrowing costs become too high, the ECB buys their debt to effectively reduce their cost of borrowing. So far this has been working but it is inevitable that the political will of the creditor nations will eventually be tested. Germany in particular will need to decide just how far they are willing to go to save the EU. To quote billionaire investor, fund manager and philanthropist George Soros, "Germans must accept a greater commitment to helping not only their interests but the interests of the debtor countries. Germany must act as the leader of the union such as the United States was for the free world after the Second World War." Notwithstanding the unwillingness of politicians in both Europe and the US to deal with public debt, it increasingly appears that the most important actors in keeping an economy healthy are not self-interested politicians but rather the unelected central bankers. Low interest rates and bailouts for key players that are "too big to fail" continue to ensure stability for the global economy; this bodes well for the global recovery.
In spite of debt and political issues we must not lose sight of the fact that our top class fund managers simply invest in the stocks and bonds of profitable companies and make every effort to buy low and sell high. It is apparent that bonds have had a tremendous run over the past number of years and that all good things must come to an end; considering this, our managers are now getting out of bonds and into stocks. Equities currently look much more attractive; for example IBM recently issued a 10 year bond at less than 2% while buying back their own stock with the money raised. This is evidence that the smart money is getting back into the stock market; in turn our fund managers continue to add value by buying stock at a discount and selling bonds at a premium. Please feel free to contact us for a review of your portfolio.
All the Best,
Anthony Ciccone, B.Comm., CHFC
PS – Did you know that November is Financial Literacy Month? When was the last time you did a thorough review of your finances?
After a good start to the year, markets became increasingly volatile in the second quarter. Europe’s debt crisis escalated once again, and somewhat subdued economic activity caused investors to take a more cautious tone. Although the Canadian economy continued to experience growth in both GDP and employment, the TSX suffered minor losses for the quarter.
US equity markets have performed well, gaining 9.4% year to date. This reflects America’s relative stability and the growing profits of corporations; the resilience of American capitalism continues to impress. This helps to remind us that, via the funds in which you invest, you are buying stakes in individual companies – not the market – and that healthy, profitable companies abound today, despite sometimes gloomy headlines. Considering the aforementioned, rock-bottom interest rates and the fantastic run that fixed income investments have had, equities are currently looking very attractive. Stocks expected to produce above average returns include those in financial services, even after being rocked by the credit crisis of 2008-2009, as well as technology (notwithstanding the freefall of RIM), and heath care.
Americans will go to the polls in the first week of November; Obama and Romney are currently in a statistical dead heat. At the beginning of the year Obama looked like he had a decisive advantage but this is no longer the case. Most analysts expect a tight race and that due to the Republican’s low tax policies that the markets will respond more positively to a Romney rather than an Obama victory. As with last year’s debt ceiling debacle, a hyperpartisan environment this time spurred by a tightly contested race may cause some market volatility.
Europe was once again a thorn in investor’s sides. Greece and Spain in particular continue to destabilize the global economy. Worries that Greece, which continues to struggle to meet its debt obligations, might make a chaotic exit from the EU persisted until general elections provided some stability in mid-June. At the end of June, EU leaders reached an agreement that included providing funds to struggling European banks. The deal was seen as a very positive development, especially for Spain and its troubled banking system, and prompted a rally on global stock markets.
While the pace of growth in emerging economies continued to moderate from the astounding growth that had been experienced of late, it remained relatively strong. China’s booming economy and developing consumerism continues to drive global demand, growing at an estimated 7.5% annually. The Chinese central bank cut interest rates to ensure that this growth rate is sustained; this surprise move was lauded by investors and the markets alike. However, tensions between China and the US, who accuses China of keeping their currency artificially low to increase demand for its exports, persist. Especially considering that this is an election year protectionist sentiment in the United States could flare up.
Although the global economic recovery continues, capital markets remain sensitive to every piece of news. Our fund managers continue to buy stock in companies with household names and stable earnings. So long as these companies and not just the markets continue to perform, so will your portfolio. Please feel free to contact me for a review of your portfolio, whether it is here with Ciccone McKay or with another financial institution.
All the Best,
Anthony Ciccone, B.Comm., CHFC
North American markets continued their year-end rally into January and February but suffered losses in March. As was the case last year, US markets continued their trend of outperforming their Canadian counterparts; for the quarter the S&P was up over 13% while the TSX lagged behind.
Growth in China, the world’s second largest national economy, is slowing. However, it must be noted that the astounding growth that China experienced over the past number of years could not last forever. Although a possible real estate bubble, labour strife and falling exports do pose threats to the Chinese economy, GDP growth in China still dwarfs that of the West; in fact, growth approached 10% in 2011, certainly not an indication of a coming recession. China appears poised for a soft rather than hard landing and this bodes very well for the global economy and resource-rich Canada in particular.
Although Asia continues to drive demand for resources, threats to the domestic economy include rising energy prices, a strong loonie and record levels of household debt. Being a petro currency, when the price of oil is high, so is our dollar. This may be good for Alberta, but it is particularly bad for Ontario whose economy is highly reliant on manufacturing. Expensive gas and a high dollar make both transport and the price of our exports expensive for foreign buyers. As for household debt, Canadians continue to use their homes as their own personal piggy banks. Bank of Canada governor Mark Carney recently warned that even a modest rise in interest rates could make many homeowners’ mortgages and home equity lines of credit unaffordable.
The US is still the largest world economy by twofold and it continues to improve. Three of the biggest problems that have haunted America over the last few years - lack of consumer spending, the housing market (remember the subprime crisis) and unemployment - all produced positive data for the quarter. Considering this, the US Federal Reserve announced that it would not be launching additional stimulus. Both the economic data and the government’s decision to cease massive intervention in the free market system are clear signals that the recovery is solidifying.
In Europe, the debt crisis appears to have subsided, at least for the time being. Governments across the continent continue to cooperate by imposing austerity or agreeing to bailouts, despite unhappy citizens who are in some cases even rioting. After tense negotiations, Greece was able to secure another bailout by convincing private bond holders to agree to massive write downs. On the one hand austerity is needed, but if it goes too far then it will curb spending and lead to political instability, thereby aggravating the crisis - balance is paramount. For the time being at least, Europe’s debt crisis seems to have been tamed.
Geopolitically, tensions in the Middle East have taken centre stage. Syria is on the verge of civil war, while Iran's continued pursuit of nuclear weapons has precipitated fears of a preemptive Israeli airstrike. The Middle East is once again a powder keg; however, it is by no means a foregone conclusion that it will ignite and thus far the markets have remained calm.
As is the case every quarter, there is good news and bad news. Our fund managers continue to invest in stable companies that continue to earn. So long as companies are making money one can expect long-term growth out of a balanced financial portfolio. Contact me anytime at 604-688-5262 or at email@example.com to discuss your investments.
All the Best,
Anthony Ciccone, B.Comm., CHFC
PS – Recently we have been assisting many of our clients with real estate based investments. There is tremendous opportunity, not correlated to the stock market; it’s part and parcel of a balanced financial portfolio. Ask us for details.