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March Market Update March 12, 2010

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This week marks the official anniversary of the "market low" witnessed last year when the TSX closed at 7567.  Certainly few investors expected the markets to be up 58% since then, but here we are more than half way back to the market highs we saw in June 2008. Admittedly we likely should never have been above 15,000 since oil prices were far too high, but the tolerance for risk has increased over the past 12 months as the market has become much more comfortable with the recession being over and the economic recovery under way.

The bull market that commenced on March 9, 2009, has just marked its first anniversary. A summary of the movements of major global stock markets for the past 12 months is provided in the table below, along with the change in our Canadian dollar.

With major markets up considerably in the twelve-month period in their local currency, Canadian investors did not enjoy the full gain of the global markets because the Canadian dollar strengthened against most currencies over this same time period.  None-the-less, the returns have given investors a reason to smile again.

BRIC countries such as Russia (+117.5%) and India (+109.0%) were in the lead on the performance rankings, but China (+44.9%) - the first country to commence a bull market advance in November 2008 - has slipped badly over the past few months.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 8.4% higher. Mexico and Israel could be the next countries to eliminate the bear market losses. The Dow Jones Industrial index and the S&P 500 Index are still 25.4% and 27.1% (respectively) below their October 2007 bull market peaks.  The S&P/TSX index is still 22.2% off its’ June 2009 high.

Considering stock market performance against the background of economic growth, Northern Trust Economist, Asha Bangalore said: “Real GDP growth across the world is yet to match the noticeable gains seen in equity prices during the past year. The US economy largely held steady on a fourth-to-fourth-quarter basis in 2009.  Growth in the European Union fell 2.3% in the final three months of 2009 on a year-to-year basis. Real GDP advanced at a rapid clip in China (+10.7%), while India (+6.1%) and Australia (+2.1%) also recorded gains in real GDP in 2009.”

“Typically, equity prices are leading indicators of economic growth. Based on this consideration, are the sharp upward movements of equity prices over the past year sending a message of robust economic growth in the quarters ahead? The answer depends on the economy in question. With regards to the US economy, while there are many improving conditions, both the credit market headwinds and the weak labor market conditions cast a shadow on the possibility of a strong recovery.”

I continue to see 2010 as a transition year for many of the world’s economies as they ease off (Government) life support. I continue to believe that equities will outperform bonds, and bonds will outperform cash.  I expect that there will be a sector rotation that will result in active management performing better than passive exposure to all sectors as you would achieve through an index fund.

A number of clients followed up with me after my February 2nd Market Commentary and Strategy regarding the “hub and spoke” strategy of adding a few specific individual stock selections to your conservative and diversified Pinnacle or Russell pension portfolio.  The recommendation to take some profits on the Canadian banks and move into the technology company RIM (Research in Motion) has shown excellent short term results, with RIM up 15% in the past month.  If you would like to discuss this “hub and spoke” strategy and its appropriateness for you, please call me.