First Quarter Commentary

After a very rocky start to the quarter, stock indexes rebounded and posted positive returns. An oil price recovery, receding recession fears and easy monetary policy from central banks keyed a powerful recovery in global stock markets. The Canadian Stock Market (as measured by the S&P / TSX) gained 3.7%. Coincident with the January bottom in oil prices, the Canadian dollar (relative to the US dollar) began a torrid rally. While US stock indexes were up modestly (0.8%) for the quarter, Canadians experienced declines from their US investments due to the depreciating US Dollar. The bond market was an oasis of stability, returning 1.4% with positive returns in all three months.

With the market declines of January and August, investors have now experienced a double dip correction . Although we expect volatility to remain elevated, we do not anticipate another significant correction in 2016. The US economy continues to grow implying a low probability of recession. The Canadian economy is also poised to expand as we have seen the trough in commodity prices. Oil Prices are up over 45% from their January lows, and while they are unlikely to revisit the January bottom, the rally is running out of steam. The recent federal budget with its emphasis on increased spending will also provide a boost to the economy.

The structural underpinnings are in place for stocks to continue moving higher. While the North American economy continues to grow at a tepid pace, stock valuations based on corporate earnings remain reasonable. Over the last couple of years, corporate earnings growth has been muted by the strong US dollar. The recent strengthening of the Yen and Euro will reverse some of last year’s currency pressure providing a tailwind for both revenue and earnings growth. The headwind for earnings will not completely disappear as most commodity based currencies (such as the Canadian Dollar) are still down relative to year ago levels. The lower dollar will also make the goods and services of US based companies more competitive. The positive currency effects will result in US and Canadian earnings growth re-accelerating which will be beneficial for stocks.

The Federal Reserve Board Open Market Committee (The Fed) remains committed to further rate increases, albeit at a slower pace than communicated in December. Chairwoman Yellen recently stated that The Feds current intention is to be less aggressive than their original plan from three months ago. This was positively received by investors as they perceive that the Fed is going to be lower for longer with respect to interest rates.

In Canada, the Liberal government's recent expansionary budget should provide additional stimulus to the economy. This reduces the likelihood of another reduction in the Bank of Canada rate. Low and stable interest rates implies that expected bond returns should be close to the current yield of 2 - 3%. The risk of widening spreads with an increase in rates for 5 and 10 year Canadian bonds is also a distinct possibility. This would put additional pressure on bond returns.

A wrinkle for stocks this year is that we are entering a presidential election cycle that looks to be one of the wackiest ever. Despite a spirited challenge by Bernie Sanders, it is likely that the Democrats will anoint Hillary Clinton as their candidate. While Donald Trump has a significant lead amongst Republican candidates, there is still a great deal of uncertainty as to who will win the Republican nomination. Assuming the presidential candidates are the current leaders (and this is a big assumption on the Republican side), we should expect a heightened level of financial market turbulence. Both candidates are polarizing figures with neither being particularly well liked, respected or trusted.

We continue to believe that we remain in a low return, highly volatile environment. Stocks should do better than bonds. Assuming the oil rally that drove the Canadian stock market has exhausted itself, the US market should perform better than the Canadian market. We are in the late stages of an economic expansion and a bull market. Stock markets can still advance from current levels, but progress is likely to be choppy. Cautious investment strategies with a tight handle on market conditions will be invaluable over this coming year.

Contact us to discuss if your investments are properly positioned in an increasingly turbulent world.