Our Library

December Review and 2011 Outlook January 17th, 2011 By Kim Mailey, CFP

Send to a Friend Back to Our Library

December Review

Equity markets ended 2010 with a positive fourth quarter characterized by a weak November sandwiched between a solid October and the best December performance for the benchmark S&P500 Index since 1991. Investors appeared to be willing to overlook the many risks that threaten a sustainable economic expansion and were more inclined to look "across the valley" of economic recession as most economic data shows signs of improvement. In a demonstration of the market's enthusiasm, U.S. equity markets along with the MSCI World Index closed the year at their highest levels since the demise of Lehman Brothers in September of 2008. Although labor markets remain stubbornly weak, jobless claims released in late December came in below the important 400,000 level which is their lowest level in two and a half years. Despite these issues however, investors were encouraged by the prospect of another season of better than expected earnings results for the fourth quarter and expectations for increased holiday spending which enhanced the traditionally positive December equity market performance.

	2010 Return
TSX Composite Index	+14.45%
S&P 500 Index	+12.78%
MSCI EAFE Index	+ 4.90%
Average 1 Year GIC	+ 1.00%
Canadian vs. US $	+ 5.51%

In U.S. equity markets the benchmark S&P500 Index rallied 6.5% while small and medium cap stocks performed similarly: small cap S&P 600 Index outperformed slightly while advancing 7.5%, and the mid-cap S&P 400 Index climbed 6.4% during the month. All ten sectors posted positive returns during December with greater gains found among more cyclically oriented sectors. The strength in commodity prices supported significant outperformance within the Materials and Energy sectors, while financial stocks were the best performers as a group. Gold bullion futures closed at an all-time high of US$1421/oz., advancing 2.5% for the month. As mentioned, most commodities advanced as crude oil futures moved higher by 8% in the quarter, while copper futures jumped 16%, closing at a record US$4.45/lb. Coal prices surged due to supply shortages resulting from flooding in Australia, a dominant supplier of coal used for steel making. The flooding, and consequently the supply disruption for coal, is expected to impact coal markets through the year ahead.

2011 Outlook

For 2011 I expect equity markets to trend higher; however, similar to the choppy nature of the economic recovery, I anticipate stock prices will continue the uneven trading pattern observed over the past two years. Given the equity market rally experienced since late August, much of the earnings growth anticipated in 2011 may be priced in already and I remain mindful of the threat of a modest pullback in stock prices. Although numerous obstacles continue to serve as potential risks to the market's positive momentum, most of these negative factors have been known by the market for some time and are not new.

The positive influence of strong corporate earnings, healthy balance sheets, and reasonable valuations are supportive of equities. From current levels I would expect modest capital appreciation over the coming year. Stocks are likely to remain range bound, trading within a broad price band, exhibiting a series of higher lows, and higher highs. This potential for ongoing volatility, combined with a low interest rate environment supports the dividend investment theme that has provided a counter force to the cyclical strength exhibited during 2010.

Areas to be Wary:

• Although rates are not expected to go up into late this year and early next year, beware of having too much debt (mortgages etc.) with a variable rate.
   
• Government bonds are expected to have a negative return over the next couple of years.
   
• Passive management through ETF Exchange Traded Funds) are expected to underperform active management.
   

Areas of Opportunity:

• Equities are expected to outperform bonds and provide returns in the 5% - 10% range - not unlike 2010.
   
• Corporate high yield bonds are expected to provide attractive returns.
   
• The US and European markets offer attractive valuations.
   
• Emerging Markets are expected to provide attractive returns. One of the safest ways to have exposure to this area is the Canadian market and its high exposure to energy and resources.
   
• A diversified portfolio of high dividend paying common shares
   

TIME SENSITIVE OPPORTUNITY

A new issue is coming to market that I think is quite attractive for clients wanting to take advantage of the last two bullet points above. I have recently met with the portfolio manager and he has a very strong track record. The investment will offer:

• A diversified exposure to Canadian companies that provide the highest yields
   
• A good exposure the sectors that will benefit from the expected strength in the Emerging Markets
   
• Provides tax efficient monthly distributions
   
• Distributions can be paid out or reinvested.
   
This article is for information purposes only. All performance data represents past performance and is not indicative of future performance. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article. ScotiaMcLeod does not offer tax advice, but working with our team of experts we are able to provide a suite of financial services for clients. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.