The positive momentum in capital markets continued through the first quarter of 2013, with U.S. and world stock markets posting double-digit returns and strongly outperforming bonds.
The MSCI World Index climbed 10.1% in Canadian dollar terms, led by robust results from the U.S. and Japan. In the U.S., the S&P 500 Index reached a record closing high and finished the quarter with a gain of 12.9% (in Canadian currency). The U.S. market’s advance was led by mainly defensive sectors, such as health care, consumer staples and utilities, while those sectors that are most responsive to a growing economy, including technology and materials, were laggards. Several other global equity markets made solid quarterly gains, including those in Australia and the U.K. Japan’s Nikkei Index posted the strongest increase for the period, adding almost 20% local currency terms. Stocks in that country benefited from a combination of expansionary monetary policy and fiscal spending, and central bank efforts to weaken the yen in order to boost exports. Markets in Hong Kong and Shanghai, however, were negative for the period, reflecting concerns about China’s slower growth rate and anticipated economic reforms.
Canada’s S&P/TSX Composite Index was also positive, posting a quarterly gain of 3.3%. Although most sectors added value, Canada’s resource-heavy market was affected by lower commodity prices, and the materials sector recorded a loss for the period. Results for the financial sector also were lacklustre.
The bond market was stable during the quarter, generating modest returns. Canadian and U.S. government bond yields were little changed, while yields for corporate bonds continued to decline due to strong demand. Inflation remained low and the U.S. Federal Reserve repeated its pledge to keep interest rates low until the country’s unemployment rate declines to 6.5%. As a result, investors had little reason to expect higher interest rates in the near term.
The strength in stock prices over the past five months signals an important shift in investor sentiment. The S&P 500 Index, for example, was up 14.0% in Canadian dollars over the five months ending March 31, 2013. Investors have drawn confidence from the global economy’s continued moderate expansion, particularly in the U.S., where corporate profits as a percentage of economic output remain at a record high and employment, consumer spending and housing data have all improved. However, concerns remain over new taxes and spending cuts related to the country’s budgetary “fiscal cliff” that may cool consumer and corporate spending. The first quarter also brought a reminder that Europe’s debt woes remain an issue, as ongoing recession fears and the 10 billion euro bailout of Cyprus rattled financial markets.
Given this backdrop, I continue to believe investors are best served by a diversified approach to investing, – one that provides exposure to a broad range of investments from equities to bonds, depending on their personal objectives. This is especially important to long term investing such as planning for RRSP, RDSP, RESP or TFSA.