Summer is finally here! School is out. Golf is in. Patios and vacations are enjoyed to their fullest. Summer also typically marks a less busy, somewhat lackluster time for equity and fixed income markets. This summer may be a little bit off of the norm thanks to overseas events – in particular, the fiscal debates surrounding Greece.
The end of the second quarter was marked with higher volatility and negative markets triggered in part by Greece. How can a country that represents less than 2% of the European Union economy carry such weight in equity markets, especially those on another continent, here in North America? Well, let us remember that the markets hate uncertainty. And it’s up for debate whether or not a default by Greece (Grefault?) or its exit from the European Union (Grexit?) has any real bearing on North American equities. What isn’t up for debate is the fact that the markets tend to loathe uncertainty, and the situation unfolding in Greece brings with it a high level of uncertainty.
See attached link to The Globe and Mail July 13, 2015 update: Eurozone Leaders reach unanimous Greece Deal
Like so many other markets around the world, the S&P/TSX Composite Index delivered disappointing performance in the second quarter by falling -1.63% including dividends. The first quarter saw the Canadian economy contract by -0.6% on an annualized basis which was followed up by an additional contraction in the month of April, marking four consecutive months of negative growth. Not surprisingly, much of the weakness came from the energy sector which saw companies slash capital budgets in reaction to lower oil prices. The price per barrel of crude oil gained in the quarter from its low in March to close just below US$60/bbl. The loonie regained lost ground against the U.S. dollar in the second quarter picking up 1.67% to US$0.8017. However, expectations are for the Canadian dollar to continue to fall relative to the U.S.
U.S. stocks gained a mere 0.28% in the second quarter including dividends, as measured by the S&P 500 Index. With the modest gain in the loonie, the S&P 500 Index fell by -1.37% including dividends when measured in Canadian dollars. Global stocks, as measured by the MSCI World Index gained a modest 0.49% in U.S. dollar terms and fell -1.17% in Canadian dollar terms in the first quarter. The lackluster performance in the global index was evenly spread across markets around the world. European stock market performance was equally weak as that of U.S. stocks, returning 0.68% (in U.S. dollar terms) as measured by the MSCI Europe Index. Overall, stocks traded sideways through the quarter, impacted by Greece, and also by speculation around when the Federal Reserve will start to raise interest rates.
Market participants are keeping a keen eye on the Fed in anticipation of a return to a rising rate environment. The last time the Fed shifted its policy to interest rate increases was 2004. This time around with the slower U.S. and global growth environments along with lower inflation just about everywhere in the world, it’s unlikely that we would see interest rates move up sharply. Rather, expectations are for a very gradual increase to interest rates in the United States and, in Canada, we may even see one more interest rate cut before year end.
This past March marked the 6th anniversary of the current bull market for North American Equities. Having survived the debt ceiling, the fiscal cliff, Russia invading the Ukraine, and oil collapsing to a low of US$43, the current bull market has been resilient, to say the least. That does not take away the prospect of a possible correction. It has, after all, been nearly four years since the last correction for the S&P 500 Index (August 2011). In Canada, the S&P/TSX Composite Index suffered a correction last year coinciding with the drop in oil prices. The downside was largely limited to the energy sector. A correction within the context of a long-term bull market wouldn’t necessarily be a bad thing though; even bulls need to take a breather.
Overall, we remain cautiously optimistic towards the market through the remainder of 2015. While the outlook remains positive, we should continue to expect gyrations in the stock market with every “Greek” headline. Keeping our eye on the longer-term and maintaining a good balance between stocks and bonds should serve us well. In the meantime, let’s enjoy the summer.
As always, if you have any questions about the markets or your investments, we are here to talk.
This second quarter 2015 market update is courtesy of Manulife Securities