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January 2010
Stock markets around the world staged a remarkable recovery in 2009, after the collapse of 2008. The Canadian market (Toronto's S&P/TSX index) put in a respectable 30.7% return, leading the Dow Jones 18.8%. Some of the markets around the world had even larger recoveries but in most cases they were from even steeper drops, the previous year.
It appears that the recovery in economic activity has taken root but this recovery needs lots of tender loving care. According to Deutsche Bank "we are in a recovery but it is fragile". According to them some of the reasons for this recovery are; employment gains are expected in the first quarter of 2010, China continues to experience growth, inventories need to be rebuilt, corporate spending is expected to increase and U.S. housing is expected to continue to recover.
Sovereign debt (debt of countries) has increased dramatically. This was necessary to bring the various economies out of what could have been a depression. They did the right thing. Now the tricky part will be to start paying down this debt rather then to leave this debt-monster to lurk around. Canada is in the fortunate position of having reduced its debt leading up to the economic crisis of 2008. Canada's debt-to-GDP(Gross Domestic Product) is expected to rise from the 25% area to about 35%. In international terms this makes us look absolutely virtuous. It appears that the Conservative government will tackle the debt problem with vigor. Other countries, like the U.S., have been saddled with debt levels that could have dire consequences.
We expect interest rates to rise and to rein in fiscal policy. The risk is that policy makers may decide to go to early and could cause a "double dip" recession or they could hold off and see inflation get more solidly embedded. We think the policy makers will risk a little inflation rather than more recession.
Bill Gross, manager of PIMCO, one of the largest bond funds in the U.S., has said that Canada has escaped from most of problems of the economic crisis. He has picked Canada as one of his top areas to invest in. Gross mentions that opportunities outside North America may be key to generating solid returns going forward. Agriculture and Oil & Gas, are two of the business sectors that should perform very well as the world moves out of recession into recovery. Many people around the world, especially in large, strong economic growth countries such as the BRIC group (Brazil, Russia, India and China) have populations demanding more and better food, more energy and a higher standard of living in general. Better agricultural practices and more energy consumption (Oil & Gas) will be vital.
While interest rates are very low, the yield curve for bonds is relatively steep. This can be interpreted as being bullish for the economy and therefore for the stock market. With increased demand for money interest rates will start to rise and the prices for bonds and other fixed income investments will decline.
Earnings are expected to recover in the last quarter of 2009. In the fourth quarter of 2008 the earnings for the S&P 500 was only $5.62. For the same period for 2009, expectations are for earnings to come in between $15.80 and $17!
We don't want to suggest there are no risks going forward but there are a number of
positive signs and the market valuations are reasonable. We continue to watch for any
cracks in our forecasts or for changes to fundamentals.
| Dec. 31 2004 |
Dec. 31 2005 |
Dec. 31 2006 |
Dec. 31 2007 |
Dec. 31 2008 |
Dec. 31 2009 |
% Change 2008-2009 |
||
|---|---|---|---|---|---|---|---|---|
| Stock Market Indices | ||||||||
| S&P/TSX Comp. | 9,247 | 11,272 | 12,908 | 13,833 | 8,988 | 11,746 | 30.69 | |
| Dow Jones | 10,783 | 10,718 | 12,463 | 13,265 | 8,776 | 10,428 | 18.82 | |
| S&P 500 | 1,212 | 1,248 | 1,418 | 1,468 | 903 | 1,115 | 23.45 | |
| Commodities | ||||||||
| Gold - US $ | 438.00 | 518.90 | 638.00 | 833.90 | 884.30 | 1,095.20 | 23.95 | |
| Crude Oil - US $ | 43.46 | 61.04 | 61.05 | 96.00 | 44.60 | 79.36 | 77.94 | |
| Natural Gas - US $ | 6.19 | 11.23 | 6.30 | 7.46 | 7.17 | 5.82 | -18.83 | |
| Currencies | ||||||||
| Euro in Cdn $ | 1.62 | 1.38 | 1.54 | 1.44 | 1.70 | 1.50 | -12.00 | |
| Pound in Cdn $ | 2.30 | 2.00 | 2.28 | 1.96 | 1.79 | 1.69 | -5.46 | |
| US Dollar in Cdn $ | 1.20 | 1.16 | 1.17 | 0.99 | 1.22 | 1.05 | -14.54 | |
| Interest Rates | ||||||||
| Cdn Prime Rate | 4.25 | 5.00 | 6.00 | 6.00 | 3.50 | 2.25 | -35.71 | |
| US Prime Rate | 5.25 | 7.25 | 8.25 | 7.25 | 3.25 | 3.25 | 0.00 | |
| Cdn 10 yr Bond | 4.31 | 3.98 | 4.08 | 4.00 | 2.67 | 3.62 | 35.58 | |
| US 10 yr Bond | 4.22 | 4.39 | 4.70 | 4.25 | 2.21 | 3.38 | 52.71 |
