After more than four years of trying to boost its economy
through extremely low interest rates and other measures, the U.S. Federal
Reserve declared a tentative victory in the second quarter of 2013. Cheered by strong
jobs and housing data, Fed Governor Ben Bernanke suggested that it may begin to
scale back its massive bond-buying program, known as quantitative easing, later
this year and allow interest rates to rise in 2014.
However, global capital markets reacted to the Fed’s move with a
sharp drop in prices as the second quarter drew to a close. Concerns about a
credit crunch and slowing growth in China contributed to the pullback.
Government bond yields rose sharply, with the yield for the 10-year U.S. Treasury
bond climbing to its highest level in more than a year. Prices for high-yield
and investment-grade corporate bonds and real estate investment trusts also
moved lower as investors became more concerned about valuations. Prices for
many commodities, including oil, copper and other base metals, were weighed
down by the outlook for Chinese growth. And gold, which many investors held as
a hedge against inflation or market volatility, lost more than 20% of its value
during the quarter.
For many stock markets, the drop in June was not enough to
offset earlier gains. U.S. equities as measured by the S&P 500 Index
finished the second quarter with a rise of 6.5% and most European bourses also
managed modest increases in Canadian dollar terms. Japan’s stock market
continued to benefit from central bank efforts to inflate the country’s economy
and boost exports, finishing the three months 8.4% higher. Emerging market
equities, however, were dragged down by the prospect of higher U.S. interest
rates, China concerns and weaker commodity prices. The resource-heavy Canadian
market, as measured by the S&P/TSX Composite Index, shed 4.1% and
Australia’s market lost 10.8%.
For the first six months of the year, the S&P 500 in the
U.S. was up an impressive 20.3%, while the MSCI World Index, representing
global stocks, was up 14.9%. (As these returns are in Canadian dollars, they
also reflect a decline of more than 5% in our currency relative to the U.S.
dollar over that time.) Meanwhile, the Canadian market continued to lag, returning
-0.9% over the six months.
Bond markets did not fare as well as stocks in the first half of
the year. Thanks to rising yields, the DEX Universe Bond Index declined 2.4%
during the quarter and 1.7% for the year-to-date.
The reaction to Bernanke’s comments seemed counter-intuitive, as
market moves often are. He was acknowledging that the U.S. economy has made
great strides since the financial crisis of 2008, making monetary stimulus less
necessary. The positive trends in the economy, including low inflation, healthy
corporate earnings, improving employment and the surprising strength in
housing, are factors that should support U.S. capital markets. And although
other regions, including Europe and China, continue to work through structural
and financial issues, business conditions remain accommodative and global
credit markets are functioning well.
As we have seen this year, both market declines – and gains –
are unpredictable in the short term. I continue to believe the best strategy
for investors is to take a long-term view, investing with care in a portfolio
that is well diversified by asset class, geography and industry sector and
which suits your tolerance for risk.
If you have any questions about your portfolio results or your
overall financial plan, please do not hesitate to contact me.
Have a great weekend,
Tracey
Source: The information in
this letter is derived from various sources, including CI Investments,
Signature Global Asset Management, Cambridge Global Asset Management, Globe and
Mail, National Post, Bank of Montreal Economics, and Trading Economics. Index
information was provided by TD Newcrest and PC Bond. This material is provided
for general information and is subject to change without notice. Every effort
has been made to compile this material from reliable sources; however, no
warranty can be made as to its accuracy or completeness. Before acting on any
of the above, please contact me for individual
financial advice based on your personal circumstances.
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