Summary

  • Stocks rose in Canada for the 8th straight month in February as the S&P/TSX Composite Index generated a monthly total return of 4.44%
  • The Canadian bond market moved up marginally last month, generating a return of 0.23% as longer-term bond yields fell slightly despite the fact that short-term interest rates moved higher.
  • Commodity markets were sharply higher in February as the turmoil in the Gulf Region and Northern Africa pushed oil prices higher. The CRB Commodity Index was up 5.94%.
  • The Economic data continued to improve last month, particularly in the consumer sector. The Canadian Dollar had one of its stronger moves in recent years, gaining 2.7% versus the US dollar during February.
  • In terms of stock sectors, the heavyweight Energy and Financial sectors lead the way in February with gains of 6.6% and 6.0%, respectively. The Mines and Metals, Utility, Telecom and Consumer sectors all lost ground.
  • Our Stock Market Outlook is still bullish over the medium-term as economic growth is recovering, profits continue to improve, interest rates remain low and stock valuations are reasonable. Stocks have had strong gains since the market lows last August and are always at risk of a short-term correction. The current turmoil in Northern Africa and the Middle East seems to be providing some of that correction risk as cyclical stocks have dropped over the past few weeks. But we view that only as a short-term risk. The overall fundamental outlook argues for higher stock prices over the next few years. Corporate profits are within 10% of their prior peak and there’s no reason to think that stock prices won’t do the same.

Financial Markets: Monthly Review and Outlook

The stock market has been extremely volatile over the past few weeks as politically-motivated uprisings in Egypt, Bahrain and Libya have heightened investor fears about the possible fall-out from restricted oil supplies and sky-rocketing prices that could undermine what was an improving global economic outlook. The threats are more real than what we saw from the problems last year in Greece, Ireland or Dubai. Restrictions in oil supplies have a serious, detrimental economic impact as they shift the global balance of money flows and create higher levels of inflation. A $20 rise in crude oil prices adds US$400 million a day (or over US$100 billion per year) to the overall costs in the US economy, offsetting much of the gains from stimulus spending and lower taxes. Taking it one step further, the two oil price shocks in the 1970s (1973-74 and 1979-80) each lead to a recession in the US economy and subsequent bear markets in stocks. While we were quick to dismiss some of the headline political problems last year as not having serious or long-lasting impacts on the stock market, we would have a hard time doing the same thing in the current environment where we see regimes being toppled in countries where long-standing leaders have held absolute control over the domestic economies. Moreover, the stock market had been basically going straight up ever since the most recent lows seen last August and was probably more than overdue for at least a correction of some sort. These new developments seem to be giving the market the excuse it needed to sell off. However, it seems to be another one of those ‘rolling corrections’ for now, where the overall stock averages don’t drop that much but some of the leading sectors experience sharper corrections. That can be seen clearly in the Canadian market where some of the resource stocks have already sold off more than 25% from their recent highs while the more ‘defensive’ sectors of the market such as financials, utilities and consumer staples have actually moved higher.

Although the problems in the Gulf region are serious and could prove disruptive to the economic recovery underway, they are also part of a growing reality in our view of how the world is changing because of the impact of information and technology. The political uprisings that occurred in Egypt, then Bahrain and now Libya are not unrelated. People in those countries have much more access to information now about global conditions because of more widespread use of the internet through smart phones, Twitter, social networking and news services such as Al Jazeera. To the degree that this information makes them rebel against Totarian regimes and dictatorships is probably not a bad development in the long run. Although there seems like more bad news and disruptions in the short run such as what we’re seeing in oil supplies and prices, ultimately this could be much like the period of the late 1980’s when the Berlin Wall fell and Communist regimes all over the world lost their grip on their populations. Turning those higher growth emerging economies such as Russia into democracies has been a long and painful process but it has also been a very profitable and successful one for those who funded the right growth areas and stayed invested throughout the period. Without digressing too much more into politics we do acknowledge that the current political uprising in some of these Arab states could be tough on financial markets in the short term. But we also believe that the global economy is on a strong recovery path over the next number of years that will include a rising component of this growth coming from the emerging economies, irrespective of the timing of the political upheavals that are bound to occur.

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