Q4 Market Commentary

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Dear Clients,

 

As we say goodbye to 2015, we reflect on the year that was and the year that may be. Certainly we can characterize 2015 as a year where the equity market disappointments were happily offset by currency gains. Excluding currency, it was a sideways year marked by volatility that was not limited to just one area of the world or individual market; it was truly a team effort that drove markets up, down and, for the most part, sideways.

 

Starting at home, Canada faced a number of challenges that included a precipitous drop in oil prices, extending losses from 2014, a recession, and an election resulting in a new government. The price of crude oil continued to fall during the year with only a brief reprieve in the summer before hitting new lows in December. The pleasure at the gas pumps that Canadians benefited from translated into pain for energy stocks as the benchmark West Texas Intermediate price per barrel of oil that started the year at US$60.50 subsequently fell to US$37.50.

 

As we have mentioned in the past, oil’s problems are global. Global oil production continues to be above global demand, resulting in a significant supply glut. On one hand, oil’s drop has made it far more pleasurable (or less painful) to fill up our gas tanks today than a year ago; on the other hand, it makes being a Canadian equity investor that much more challenging as a quarter of the benchmark S&P/TSX Composite Index is comprised of energy companies. Further, it doesn’t appear that supply will be abating anytime soon. Stubbornly, OPEC producers have dug their heels into the ground and are maintaining elevated production levels. Canadian oil companies have announced billions in labour and project cuts through the year as a result. Looking ahead through 2016, a drop in supply should push prices higher, but when that drop will come is unknown.

 

As oil prices fell so too did the Canadian economy, dipping into a recession in the first half of the year. In response, the Bank of Canada Governor, Stephen Poloz, cut the overnight rate twice in 2015 (first in January and again in July) to provide support to the stagnating economy. Additionally, the Canadian dollar, which has reverted back to its petro-dollar status, fell -16.2% on the year relative to the U.S. dollar. Further, Canadian stocks, as measured by the S&P/TSX Composite Index fell -8.3% on a total return basis through the year led downward by the energy sector which was down -22.9%.

 

South of the border, U.S. equity stocks fared slightly better, gaining 1.4% as measured by the S&P 500 Index when including dividends. In Canadian dollar terms however, the returns were much improved with U.S. stocks gaining 20.1%, adjusting for the drop in the loonie. Through much of the year, the U.S. equity market was driven by speculation around what the Federal Reserve might or might not do. Ultimately, the Fed chose to raise their benchmark interest rate by 0.25% in December; the first rate increase since 2006! Looking ahead, 2016 will be a year dominated by election talk. Come November, the U.S. populous is guaranteed to have elected a new president. Leading up to election day, equity markets will most certainly be paying attention.

 

Globally, Greece and China made headlines throughout the year. Putting Greece aside, as its debt problem perhaps drew more ink than it deserved; China was the real attention grabber. The world’s second largest economy contributed to market volatility as it showed signs of an economic slowdown. Global stocks, as measured by the MSCI World Index fell –0.3% in U.S. dollar terms while gaining 18.9% when translated into Canadian dollars.

The interest rate environment witnessed its own excitement through the year with the Bank of Canada cutting the key overnight rate twice, the European Central Bank initiating its own quantitative easing program and the Federal Reserve raising interest rates. By the end of the year, Canadian bonds performed better than Canadian equities, and when excluding currency, better than foreign equities. Bonds as measured by the FTSE TMX Canadian Universe Bond Index gained 3.5%.

 

The volatility of the past year is a good example of the benefits of a diversified strategy. Markets are unpredictable. This goes for bonds as well as equities. Other factors that play into returns, currency and interest rates are as equally unpredictable. A balance between many asset classes – Canadian equities, U.S. and foreign equities, bonds and cash – will help to mitigate the volatility while working towards achieving our objectives.

 

As we move into 2016, we must consider that markets may remain volatile, certainly if the start of the year is any indication! China, the global economy, oil, the weather, and other unforeseen issues will continue to move markets in different direction. A cautious and well-balanced portfolio approach should serve us well in the coming year.

 

Finally, while you are reviewing your new year’s resolutions, it is a good time for us review your financial goals and asset allocation to ensure they line up. As always, if you have any questions about the markets or your investments, I am here to talk.

 

Regards,

 

 

Bill McElroy, BA, CIM, CFP

President, The William Douglas Group Inc.

Senior Financial Advisor, Manulife Securities Incorporated