The title phrase has been the mantra for many stock traders for years and seems appropriate to look at now since we are almost at that traditional selling time and stock traders do tend to be creatures of habit and very focused on patterns that have worked in the past.  Like the “Santa Claus Rally”, the “September Swoon” and the “January Effect”, the trading patterns are usually traced back to the impact of human emotions on stock market investing.  Investors have traditionally been optimistic in their outlook for growth and therefore would normally look positively on the potential for the year ahead in late fall and early in the year and would therefore tend to be buyers.  As the reality settles in throughout the year that results may not be as good as expected (or promised), then investors turn into sellers.  By late fall there is the added impetus of ‘tax loss selling’ which then gives way to buying in the December period.   The whole process is simple and logical in many ways. Read more »

Canadian bond yields rose and prices fell in March. Investors reacted to more hawkish comments from the Bank of Canada, but were also influenced by falling U.S. bond prices, as more favourable economic data in that country led to higher yields. The successful Greek debt swap also put pressure on bond values, as investors were less concerned about a possible European credit crisis. The selloff in the first half of the month took yields and prices outside of the trading range that had been established since late 2011, but the market recovered somewhat in the second half of the month. The DEX Universe Bond index declined 0.32% in March. Read more »

Strength in global stock markets so far in 2012 has been supported by the fact that the U.S. economy is recovering, as demonstrated by the series of better overall economic indicators since the summer of 2011.  The key reason for this recovery is because the two most important industries to U.S. growth are moving back to normal levels; housing and autos.  After falling from an annual construction run of close to 2 million new homes per year in the 2002-06 period, new housing starts fell to an annual rate of around 500,000 over the last three years as excessive inventory levels and reduced demand lead to a collapse in home prices.  While prices haven’t begun rising, they have stabilized and housing starts have risen back to the 700,000 range.  This is still well below the ‘normal’ rate of around 1.0-1.2 million annual starts (which is the number of ‘new household formations’ in the U.S. each year), but clearly the trend has improved.  A similar situation exists in the auto industry, where normal ‘replacement demand’ would put annual auto production at around 13 million vehicles.  This number dropped to under 10 million after the 2008 recession but has now climbed back up to the 11 million range.  This recovery in two key industries is also showing up in the ISI Corporate Surveys, which have recently moved up to highest level in over four years and show expansion of better than 3% in coming quarters. The better economic results have prompted Goldman Sachs to become more bullish on stock prices.  They recently put out a new trading call saying that stocks will probably begin a “steady upward trajectory” over the next few years as any declines in economic growth are already reflected in share prices.  Their overall view is that they think it’s time to say a ‘long good-bye’ to bonds, and embrace the ‘long good buy’ for equities.  The prospects for returns in equities versus bonds “are as good as they have been in a generation,” according to Goldman.  They also suggest that gains in bond yields also can support equities. Ten-year yields have climbed from a record low of 1.67% set Sept. 23, to a recent high of 2.37%.  Equities offer an opportunity now,   and emerging markets may still generate the strongest longer-term results as those economies continue to grow faster than the developed economies. Read more »

Bond prices declined and yields moved higher in February as investors became more confident about growth and less concerned about the European sovereign debt crisis. Riskier assets, such as equities and the Euro, enjoyed rallies while safer investments such as Canadian and U.S. government bonds fell in value. The DEX Universe Bond index fell 0.40% in the month. Economic data in Canada was mixed during February. Housing starts remained firm and leading economic indicators pointed to continued economic growth in coming months. Less positively, retail sales growth was tepid and the Canadian economy struggled to create new jobs. As a result, the unemployment rate rose to 7.6% from 7.5% the previous month. Inflation rebounded to 2.5% from 2.3%, in part due to rising gasoline prices. In the United States, the economic news was more positive. In particular, the labour market continued to recover from the recession as initial claims for unemployment benefits fell to the lowest level in four years and unemployment fell to 8.3% from 8.5% the previous month. Read more »

The stock market has continued to show gains so far in 2012 as investors have a greater sense of calm about the European situation and have also been encouraged by the strong economic data that continues to come out of the U.S.  The world’s largest economy has been showing renewed vigor since last fall, just as investors fears about imploding global economic growth were reaching a crescendo due to the Euro-Zone financial crisis and it’s impact on China, given that a large percentage of their exports go to Europe.  But you can’t keep the U.S. consumer down too long, and strength in retail sales, housing and employment have all lead to a resurgence in U.S. consumer confidence.   With recovery apparent in the world’s largest economy, fears about global growth have receded.  Recent corporate earnings reports were in line with expectations and still showed low double-digit year over year growth.  Investors had braced for something more dour than that.  On top of all this, there continues to be the commitment of central banks to keep interest rates low for an extended period of time and the fact that stock valuations are at historically low levels.   Given that bearish sentiment among investors had been at record highs going into last fall, the reversal of these conditions seems to have given the stock market a decent ‘tailwind’ behind it this year. Read more »

For much of January, optimism about U.S. economic growth and a potential deal to reduce Greece’s debt burden led to declining Canadian bond prices as investors switched to riskier assets such as equities and European government bonds. Later in the month, though, bond prices recovered most or all of their earlier losses as investors reacted to some disappointing economic data and a more dovish outlook from the U.S. Federal Reserve. The DEX Universe Bond index earned 0.51% in the month. In Europe, the negotiations to manage Greece’s orderly default appeared to make progress, but were not finalized by the end of January. One of the sticking points appeared to be that Greece’s fiscal situation had deteriorated significantly since last October with the implication that public sector holdings of Greek bonds, including those of the European Central Bank’s, would need to be written down as well as private investors’ holdings. However, there were indications that investors were less concerned about most European sovereign debt, as Italian, Spanish, and French bond yields fell during January, and several countries staged successful bond issues. It appeared that the ECB’s massive 3-year bank financing completed in December had substantially reduced concerns about a pending credit crisis. Outside of Greece, the only near term risk appeared to be Portugal, which saw its bond yields gap 2% higher in the month. Canadian economic data was mixed in January. The unemployment rate held steady at 7.5%, as the economy began creating jobs again. Housing starts, manufacturing sales, and leading economic indicators were all stronger than expected. However, we also learned that the Canadian economy shrank 0.1% in November, following no growth in October. While some of the slowdown was due to temporary maintenance shutdowns in the energy sector, the lack of economic momentum was worrisome. On the inflation front, the CPI unexpectedly fell to 2.3% from 2.9%, led by lower gasoline prices and passenger vehicles. Several economists suggested, though, that this drop in inflation might be a one month wonder with prices reaccelerating next month. Notwithstanding the drop in the rate in December, for all of 2011 inflation averaged 2.9%, the highest annual reading since 1991. In the United States, economic data received early in January continued the better than expected pattern of late 2011: unemployment fell to 8.5% from 8.7% as job growth was robust, construction spending was higher than expected, business and consumer confidence rose, and manufacturing activity accelerated. The net effect of the data was that investors felt more confident about the economic prospects and were more willing to take on risk. Bond yields rose as a result. Later in the month, though, the string of positive economic surprises was broken. Retail sales, housing starts, and 4^th quarter GDP were all weaker than expected, prompting bond yields to move lower again. The U.S. Federal Reserve Board met in late January and, as expected, left interest rates unchanged at near zero levels. In a noteworthy effort to be more transparent, however, the Fed released more information about the committee’s deliberations. That information included the forecasts by individual members of when they expected that the Fed would need to begin tightening. Interestingly, the various members’ forecasts showed significant dispersion, with some anticipating the first move to come later this year while others expected no change for at least 4 years. The median forecast, though, suggested that the Fed would keep rates low until late 2014, and that was longer than the market consensus had expected. As a result, bond prices rallied and yields fell, with mid-term bonds most affected. The yield on 5-year U.S. Treasuries, for example, hit record lows following the Fed’s announcement, falling below 0.75%. The U.S. housing sector remained depressed with average prices continuing to grind lower. We believe that there is substantial pent-up demand for new homes because the supply of new homes has fallen short of the need arising from new family formation and replacement for five consecutive years. During that time, approximately two million construction jobs were lost, with many more jobs in related industries also disappearing. A turnaround in the sector, therefore, would provide an important boost to the U.S. economic recovery. Until prices stabilize, however, it seems unlikely that the pent-up demand for new homes will emerge. Prices continue to fall due to the large stock of foreclosed homes that remain to be resold. So it was encouraging to hear that the U.S. government has started the process to convert pools of foreclosed homes into rental properties. We will be monitoring this initiative in the coming months to see if it has a material impact. The greater willingness of investors to accept risk in January resulted in good relative performance of corporate bonds. This sector gained 1.00% in the month, as yield spreads narrowed by an average of 11 basis points. Corporate issuance was strong in the month, with $9.2 billion of new deals. Most of the new issues were priced at significant concessions to existing secondary offerings. This factor, combined with healthy investor demand, caused the new bonds to narrow in spread following issuance. Provincial bonds returned 0.42% in the period, helped by a small narrowing of their yield spreads. Federal bonds lagged the other sectors, returning only 0.26%. The Canadian yield curve became slightly less bowed in January, as 5 and 10-year yields declined slightly while 2 and 30-year yields rose marginally. The shift in the Canadian curve reflected, in part, the mid-term rally in the U.S. bond market. However, it also appeared to reflect investor wariness regarding the low absolute levels of long term yields and their inherent riskiness. The Canadian bond market may be in a holding pattern for the next few months, as investors try to assess the impact of a European recession on global growth, and North American growth in particular. Central bankers, in Canada, the United States and elsewhere, have kept interest rates very low in efforts to stimulate growth. Expectations that those rates will remain low for very long periods have driven bond yields to record low levels. As well, concerns that monetary and fiscal authorities were running out of alternatives to stimulate their economies prompted investors to seek the security of fixed income. The success of the European Central Bank’s provision of half a trillion euros of liquidity to the European banks and the Fed’s communication of “lower for much longer”, have dispelled some of those concerns. Our economic outlook calls for tepid growth in Canada that is dependent on that of its largest trading partner. The good news is that we believe U.S. growth will be stronger than consensus estimates. The labour market south of the border continues to improve and that may bode well for an eventual turn around in housing. We believe that the most likely direction for interest rates is up, so we are retaining the defensive duration within the portfolio. With no recession expected in North America, corporate creditworthiness should remain good and that means corporate yield spreads, which are high from a historical perspective, are attractive. We are, therefore, maintaining the overweight allocation to corporate bonds. With regard to inflation, we are concerned that the recent drop will be reversed. Gasoline prices, in particular, seem to be headed inexorably higher, notwithstanding that many pundits are calling for a sharp fall. Nor will the recent collapse in natural gas prices provide much relief; the price of the commodity is only one of many components in the average utility bill and thus the recent fall is expected to lower inflation by only 0.1% to 0.2%. With central bankers still trying their hardest to stimulate growth, there is no impediment to inflation rising. Therefore, we are retaining the Real Return Bond holding in the portfolio.