A volatile month of March

by Invisor Last updated on April 07, 2015 Tags: Market & News Updates

Following a strong bullish sentiment in February, markets remained fairly volatile during the month of March. A number of the major indices, including the S&P 500 Index in the US and the S&P/TSX Composite Index in Canada, declined in value. A few exceptions were the indices in China, Japan, Germany and France, which saw an increase. China in particular, saw a significant gain of almost 15% on speculation that the government will do more to support economic growth. US 10-Year Treasury yield on the other hand, declined to 1.93% after peaking early in the month at 2.24%.

Market Performance as of April 2, 2015Source: BMO Economics, Bloomberg


What were the major themes during the month?

Mixed bag of economic data – A number of the key economic data points in the US saw divergent moves. While auto and home sales, continuing unemployment claims and personal income numbers improved, the economy continued to see weaknesses in manufacturing and personal spending. Much of the weakness was attributed to the strong US Dollar, the west coast port disruption and the very harsh weather in February.

Improvement in Europe – Although a potential Greek debt default and its exit from the Euro Zone remained a concern for investors, the major European markets showed improvement in the economic numbers. Germany and France in particular, have soared almost 20% so far in 2015 as economic data surprised to the upside. The €1 Trillion asset purchase program from the European Central Bank has also provided support to the markets, although any positive impact to the real economy remains to be seen given the program implementation has just commenced.

Divergent central bank policies – While the US Federal Reserve changed its stance from a ‘patient’ approach to increasing interest rates indicating a rise in rates was imminent, officials indicated that they wanted to see a further improvement in the labour markets and be ‘reasonably confident’ of inflation moving towards its 2% target, before increasing rates. The European and the Japanese central banks on the other hand are currently on a balance sheet expansion mode through their own versions of quantitative easing programs, which has clearly impacted the currency markets with the US Dollar seeing a significant appreciation in the last few months versus the Euro and the Yen.

Corporate sector continues to perform well – Despite a strengthening dollar, a plunge in oil prices in the second half of 2014 and a harsh winter, corporate profits continued to perform well although recent numbers have been somewhat weak relative to previous quarters, particularly given the significant rise in the US Dollar currency. There has been considerable debate about whether stocks are in the bubble territory, but the standard Price-Earnings ratios are only modestly above their 55-year historical average. Here is an interesting note from the Calafia Beach Pundit blog, in case you are interested in reading more about Scott Grannis’ argument that, despite corporate profits being very close to all-time record highs, equities do not appear to be ‘overvalued’.

So what should we expect going forward?

Although there is a general expectation that interest rates are set to rise in the near term, given the significant divergence in central bank policies and the corresponding strength in the US Dollar beginning to negatively impact the bottom-line of global conglomerates and the weakness in the US jobs numbers we have seen recently, we may likely see that the imminent rate rise may be more gradual and take longer than most would expect.

This would mean that while dividend stocks will likely perform well as investors continue to seek incremental yield, corporate stock buybacks (taking into account the strength in corporate earnings) will also likely provide support to equities, in general.

A resurgence in Europe with the lead from Germany and France will likely open up greater opportunities for global companies. As well, the depreciation in the Euro relative to the dollar would make European exports more competitive and give a boost to European corporate results in the coming months. That said, the situation in Greece (a potential debt default and an exit from the Euro) will likely bring in some added volatility in the markets in the short-term.

So what should you do?

In general, given where the various global economies are in their respective stages of evolution, equities are probably better investments to hold, relative to bonds. As European and Asian economies continue to improve with support from central bank policies, we should expect to see global equity markets continuing to do well, albeit moderately.

It would therefore, serve well for long-term investors to maintain diversified portfolios with exposures to various economies of the world. Remember that Canada’s market capitalization is only about 3% of the global market capitalization, and there are a number of opportunities to gain exposure to other international markets in a very cost-efficient manner. If you are currently holding a significant amount of Canadian equity exposure, you should consider diversifying your portfolio in order to lower your portfolio risk and benefit from the global investment opportunities.

As we always reiterate, holding a well-diversified portfolio aligned with your financial goals, reducing your total cost of investing and staying the course with your investment plan are the keys to long-term investment success!


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