After a strong performance in 2014, the North-American equity markets started off the year on a bumpy road. At the end of January, the S&P500 Index was down 3% year-to-date while the Canadian S&P/TSX Composite eked out a small positive return of 0.3% despite Oil prices collapsing.
So what were the major themes during the month?
Oil Prices were on the headlines for most of the month after crashing from a intra-day high of over $107 a barrel in mid-June 2014 to a low of below $45 a barrel during January 2015 – a 58% drop during the 7-month period. This price drop has raised many concerns over the growth prospects of the economy, especially the Energy sector which has so far significantly added to employment on both sides of the North-American border. Although in the long run, lower oil prices could benefit other sectors of the economy such as the consumer goods, the immediate concern has been the impact to the shale and the oil sands sectors that may not be able to sustain lower oil prices for a long period of time, which could eventually result in employee lay-offs and credit defaults.
Economic growth (measured by the Gross Domestic Product ‘GDP’) numbers on both sides of the border came in weaker than expected dragged down by manufacturing in Canada and net exports in the US. In the US, after 2 strong quarters, the Q4 2014 Real GDP growth slowed to 2.6%. In Canada, Real GDP dropped 0.2% in November.
On expectations of slowing growth, Bond Yields moved lower as the US Federal Reserve said it would remain ‘patient’ before raising short term interest rates. It upgraded its assessment of both economic growth and the labor market, while recognizing both lower inflation due to falling energy prices and lower market-based measures of inflation expectations. The Fed’s forecast is that the eventual bottoming out of oil prices as well as the improving labor market will likely push inflation back up toward its target of 2%.
The Canadian Dollar depreciated to under 80 US cents, down over 9% during the month on account of the bearish sentiment engulfing the markets. The surprise lowering of interest rates by the Bank of Canada to provide economic stimulus in the midst of falling oil prices, contributed further to the already weak Canadian dollar. The US dollar also appreciated against most other major currencies based on the economy’s relative strength.
As Europe was trailing the rest of the world in terms of the economic recovery over the last 6 years, the European Central Bank announced the much awaited Quantitative Easing measures with a plan to buy government bonds as part of an asset-purchase program worth about 1.1 trillion euros (US$1.3 trillion) in order to stimulate growth. While the efficacy of such programs are heavily debated, in the short term, it is expected to add to the liquidity in the market by helping corporations lower borrowing costs and take on new growth initiatives.
As expected by a number of analysts, Q4 Corporate Earnings have so far been weaker than prior quarters on both sides of the border as a result of slowing manufacturing, the immediate impact of lower oil prices on the Energy sector, and the appreciating US dollar that has significantly impacted the US exporters. However, a majority of the companies that have reported so far (out of the S&P500 Index) have beaten earnings and revenue expectations, which is a good sign. That said, a number of the global consumer behemoths like Colgate-Palmolive and Procter & Gamble cut their earnings guidance for Q1 2015. Sector performance in January varied significantly. While banks & financials, energy and industrial sectors have performed poorly, the utilities and the health care sectors have had a positive performance.
A few final thoughts
Despite the general market uncertainties that prevail today a few key economic indicators in the US continued to show signs of strength. This is important because US is still the largest economy in the world and has shown its ability to drag along the weight of other economies, such as the Euro Zone, that have struggled in the last several years.
The employment situation continued to improve as the December private sector payroll growth beat expectations by about 40K jobs, including upward revisions to prior months. Although this is a modest increase in the big picture, it is still progress. Housing continued to improve with the December housing starts beating expectations and builder sentiment suggesting conditions are likely to continue to improve, albeit modestly. Bank lending also surged, which showed another sign of continued rising confidence on the part of banks and borrowers. In the longer term, this could result in more investment, more jobs and increased productivity. Most importantly, if oil prices settle down at a lower level than what we saw 6 months ago, it would put more money in the hands of the consumer that could result in higher consumer spending. Corporate earnings in general, particularly in the consumer sector, should improve as a result, driving stock prices.
Let’s not forget that if our southern neighbours do well, Canadians should see a positive impact on our economy and corporate earnings in the long-term. That said, in the short-term there are quite a few walls of worry to deal with. However, as long as economic growth continues to persist, although modestly, and governments lower taxes (or at least not increase them) and reduce regulatory burden for corporations, we should see corporate earnings continuing to grow. Absent any major unexpected setbacks, markets will likely continue to remain resilient and climb the walls of worry, as they have done in the past.
For investors with a long-term time horizon, it would be most appropriate to remain invested in the markets by holding a well-diversified portfolio. In a persistently low-growth, low-return environment, it is all the more important to lower the cost of investing as much as possible, as otherwise it could significantly eat into portfolio returns over time.
Invisor offers Canadian investors personalized investment management solutions at a fraction of the cost of traditional advisor models, without requiring any minimum investment amounts. Get started now to tell us a little about yourself and your goals, and we’ll find an investment solution just right for you.
If you liked this blog post, please feel free to share it on your favourite social media site by clicking on the links below.