Summary

  • The stock market in Canada rose again in September with a monthly gain of 4.1%, pushing the 3rd quarter total return to 10.3%.  Year-to-date the Canadian market has gained 7.5%.  Foreign markets were even stronger as the S&P500 had its best September since 1939 with a monthly gain of 8.8%.
  • The Canadian bond market returned 0.6% in September bringing the year-to-date gain to 7.5%.  The strength in bonds came from a decline in long-term bond yields.
  • Commodity markets were strong again in September as base metals, oil, lumber and silver all gained more than 10%.  Gold prices moved up by 4.7% to another all-time high of US$1309 per ounce, putting its gain in 2010 to 19.4%.  
  • The Economic data in the US and Europe has softened somewhat in 2010 but remains positive.  Consumer spending has weakened again in the US but overseas industrial growth remains strong while corporate profit growth remains exceptional.
  • In terms of stock sectors, the strength in September was fairly wide spread with all ten sectors positive.  Market capitalization was a bigger differentiator last month as the TSX60 gained 3.3% but the smaller Completion Index (the Composite Index less the TSX60) was double that with a monthly return of 6.6%.
  • Our Stock Market Outlook is still extremely bullish at this point as low interest rates, steady economic growth, moderate stocks valuations and strong corporate profit growth have combined to make an extremely friendly backdrop for stocks.  Our expectation remains that economic growth is moderating but will continue to be strong enough to generate good earnings growth.  Meanwhile, the worries about growth will keep central banks from raising interest rates anytime soon.  Although sentiment indicators have improved, we still believe that the bulk of investable funds are still not back in the market, meaning a potential absence of sellers in the short-term.  Within our portfolios we have an emphasis on the Basic Materials, Energy and Technology sectors but are also looking to increase our position in Financial stocks, where we have been under weight during the recovery.

Financial Markets: Monthly Review and Outlook

Stock returns were strong again in September as the S&P/TSX Composite Index was up by 4.1% to help push the 3rd quarter total return to 10.3%.  Year-to-date the Canadian market has gained 7.5%.  The US market was even stronger as the S&P500 had its best September since 1939 with a monthly gain of 8.8%.  The Emerging Markets index had a huge 10.9% gain while the European markets were also up around 5-6% on average.  China was once again the only lagging market with a monthly gain of 0.6%, and is still down almost 20% in 2010.

In terms of stock sectors, the strength in September was fairly wide spread with all ten sectors positive.  Market capitalization was a bigger differentiator last month as the TSX60 gained 3.3% but the smaller Completion Index (the Composite Index less the TSX60) was double that with a monthly return of 6.6%.  The Gold sub-sector was the weakest in September, up just 0.23%, but it remains one of the strongest groups in 2010 with a year-to-date gain of 20%.  For the third quarter overall, the Canadian market was up 10.3%, with most of the strength coming from the same group of stocks that lead the market higher in 2009, that is mid-sized resource stocks.  That made Basic Materials the best performing sector in the 3rd quarter with a gain of 18.1%, also helped  by the sharp rise in Potash Corporation following BHP’s US$130 per share offer for the company.  The Energy, Financial and Technology sectors all lagged the overall market gains in the third quarter of 4.8%, 5.7% and 3.5%, respectively.

Although stocks are only up slightly thus far in 2010, the path here has been anything but straight.  Major stock averages have been in a relatively ‘tight’ trading range for most of 2010, rallying early in the year to a peak in late April and then going into a 4-month decline to take index levels into loss territory for the year, only to rally back up again in September, traditionally one of the worst months of the year for stocks.  Clearly the rulebook has been ‘thrown out the window’ for most of the traditional seasonal moves in recent years, although the ‘sell in May and go away’ adage was a money-maker.  But after sentiment indicators at the end of August showed that pessimism had increased almost all the way back to the March 2009 levels, stocks reversed course in September with the US stock market seeing its best September since 1939! September’s rally came off a miserable August in which the S&P dropped 7 percent from Aug. 2-26 on fears that both housing and unemployment were getting weaker instead of better and would lead the economy back into recession.  The market correspondingly started pricing in those double-dip fears. But incremental improvements since then have reversed that trend.

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