In the first quarter of 2014, both the TSX and S&P 500 produced slight gains. The TSX is now at its highest level since the financial crisis of 2008 but is still a long way from its all-time high; the S&P 500 remains at or near record highs. This was the most volatile quarter in some time, however by the end of March markets were more or less where they were at the end of 2013.
January’s correction did not come as a surprise considering the growth experienced since 2009. The biggest news of the quarter was Russia’s annexation of the Crimean peninsula. Putin continues to test the West and this region could still flare up and cause problems for global markets. The other news makers for the quarter were the unexpected continuation of rock bottom interest rates, persistently low inflation and the Federal Reserve’s “tapering” of its quantitative easing program.
Recently, there has been fear of “tapering” in financial circles. Tapering is the term coined by former Federal Reserve’s chair, Ben Bernanke, to describe how the Federal Reserve will taper - or reduce - the size of the bond-buying program known as Quantitative Easing (QE).QE is designed to stimulate the economy but also serves the secondary purpose of supporting financial market performance. QE is based on the most important and elementary law of both monetary policy and economics – supply and demand. The artificial flow of easy, cheap money into the economy stimulates both the economy and the stock market, not just in the US but globally. There were fears that tapering would put the economy back into recession; so far this has not been the case and monetary policy continues to work.
Most commodities performed well during the first quarter. Gold was up more than 6% which helped to boost the TSX. This sector has been beaten down over the last few years as China’s demand for a number of key commodities has slowed. Additionally, the fear of inflation spurred by the Federal Reserve’s bond buying program diminished as inflation has been all but non-existent since the Financial Crisis ended. Historically, investors have turned to commodities and commodity-related companies during inflationary periods to preserve purchasing power. During the first quarter we started to see hints of this as select commodity prices increased, but failed to be supported by non-existent inflation.
Most developing economies did not fare so well this quarter. Slowing economic growth in China, which had its first-ever corporate bond default in March, combined with the weakening of the Chinese currency, had a negative effect on the local stock market. Despite fundamental weaknesses in China and geo-political troubles in Russia, other emerging markets such as India and Brazil did quite well. That being said, we continue to find developed markets such as Canada and the US more attractive investment opportunities on a risk vs. reward basis in the current economic environment.
All the best,
Anthony Ciccone, B.Comm, CHFC