The headlines have finally turned in a positive direction. European stability has been enhanced by the restructuring of the Greek debt and the promise of additional short-term financing. Spain and Italy have taken steps to improve their financial situation leading to lower yields on their government debt. Although Europe is in a mild recession, the US economy is experiencing growth. Employment, industrial production and housing data are all moving in the right direction. The combination of the resolving Greek debt crisis and US economic growth has led to cautious optimism on the part of investors. In turn, this has resulted in a strong first quarter with the US market appreciating 12% in US dollars and 9.7% in Canadian dollars.
The Canadian stock market also experienced growth, albeit only 3.7%. This is in part related to fiscal interdependence on Chinese economic growth, which declined to 8%. Canadian stocks which are exposed to the commodity sector were impacted by a concern about a progressive decline in the Chinese economy. We continue to believe that Chinese economic growth of 8% will be the norm for the next few years, with a shift away from infrastructure spending to consumer led spending growth. Financial stock strength related to an easing in the European debt crisis and strengthening of the US economy provided some support for the Canadian stock market.
As the US economy accelerated, bond prices experienced a small decline. Bond yields compensated for the price declines, leading to flat total returns. Bonds remain a relatively safe investment, however in light of the current low interest rate environment and the strengthening US economy, we would not be aggressively investing in bonds.
Our last quarterly commentary cautioned that investors may find themselves in the position of chasing a rising market. The last 5 years have seen investors moving into more conservative assets (such as cash or bonds) leaving themselves underweighted in equities. Despite the recent run in stock prices, market valuations remain relatively inexpensive. We believe the current upswing is likely to continue. This is supported by a reduction in the severity of the global financial crisis, slower but continued growth at 8% for the world’s second largest economy (China) and a strengthening US economy.
S&P 500 Multiple is Still Below Long Term Average
The S&P 500 has increased by over 10% in each of the last two quarters. While the media remains skeptical, we believe that we are in the early stages of a bull market for stocks. Most bull markets tend to climb a wall of worry and there is a multitude of issues for investors to fret about.
It has been a long time since investors experienced a bull market. The new crop of relatively inexperienced investors may not recognize its return. There has been a notable decrease in both market and individual stock volatility since the beginning of the quarter. The only tell tale bull market characteristic currently missing is a full blown public euphoria. The longer this bull market
