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John Zechner
January 6, 2017
The stock market continued the ‘Trump Rally’ in December, although it did lose some steam in the final week. The Canadian market gained 1.4%, driven almost entirely by the Financial sector. U.S. stocks also continued to move higher, but the big winners were the European stocks with the Stoxx50 up 7.8% in December alone, although it was still down 6.2% for the full year. The biggest gainers for all of 2016 included Brazil (+39%), Russia (+24%) and Canada (+18%). Clearly the commodity-based economies made a comeback after five dismal years. The Financial sector was the biggest contributor to the stock market in Canada last month, gaining 3.2% to account for almost all of the market’s gains in December. Utility stocks also bounced back (+2.6%) as did preferred shares, which gained 3.6% for the month. For all of 2016, the Energy sector was the big winner, gaining over 36% after two tough years in 2014-15. Golds were also strong despite weakness in the 2nd half of the year. The Gold sub-index was up 50% in 2016. Health Care was the biggest laggard, dragged down by weakness in Valeant. That sector fell 44% in 2016.
Bond markets across the globe had their worst quarter in years as investors feared that the Trump presidency will lead to higher inflation and rising interest rates. In Canada, the FTSE Canadian Bond Index fell 3.4% in the 4th quarter as 10-year government yields rose from 1.00% to 1.54%. Long-term bonds dropped the most, with the 30-year index losing 7.5% in the same period as yields rose from 1.62% to 2.31%. Corporate bonds fared somewhat better, losing only 1.8% in the 4th quarter.
The CRB Commodity Index gained 1.73% in December to finish with a 9.9% gain for all of 2016. The OPEC supply agreement at the end of November pushed the gain in oil prices to over 45% for the year, following on the heels of a 70% decline in 2014-15. Other big gainers in 2016 included natural gas (up 59%), lumber (up 23%) and copper (up 16%). But the most surprising winner was metallurgical coal (used in steel making). Cutbacks in Chinese production allowed this commodity to rise from under US$100 per tonne to over US$300, helping Canada’s Teck Resources to increase over 500%!
While the global economic data remained positive, there has been a clear slowdown in the 4th quarter. Consumer and employment data have improved in the U.S. but Europe remains in a slow growth mode. Chinese growth has stabilized but has been supported almost entirely by government spending funded by continually rising debt levels. Chinese debt has risen to over 250% of GDP, higher than what we see in Greece in 2011! Emerging economies had begun to recover but are now faced with a rising U.S. dollar and the risk of trade disputes with the new administration in the U.S. Following seven years of ‘post financial crisis’ global growth, the risk of a slowdown in 2017 seems to be increasing in our view.
But investors have clearly been seeing the glass as ‘half full’ when assessing the outlook for the U.S. and global economies under the new Trump regime. Expectations are elevated, consumer and business confidence is rising and the sentiment indicators in the stock market have become almost ‘giddy’ as investors place their bets on 2017, believing that lower tax rates and less regulation will ‘unbind the straps’ that have kept the U.S. economy at an anemic growth rate over the last eight years. Interest rates have started to rise again as inflationary expectations increase while profit growth is expected to surge next year. This has lead to great strength in the U.S. dollar as capital flows back into the country, attracted by stronger growth potential as well as rising interest rate differentials versus Europe and most other financial markets. Industrial and financial stocks have lead the recovery in the U.S. market following Trump’s election win on November 8th as those two sectors are believed to have the greatest potential for profit gains when fiscal spending starts to increase again on a host of infrastructure projects, all designed to ‘make America great again!’ Ignore for now how all these promises get paid for when debt has already tripled in the past 12 years to almost $18 trillion and that the cost of servicing this mountain of debt is also going to increase as interest rates rise. For now, it’s all good and investors don’t want to hear any ‘whining’ from non- believers!
Moreover, it’s not just the investing public that is buying full tilt into the euphoria. The major financial publications have also become ‘cheerleaders’ for the advance. Witness below the most recent covers from the esteemed publications ‘Barrons’ and ‘The Economist.’
Of course, the timing of these cover stories has proven to be ‘less prophetic’ in their accuracy, thinking back to such events as:
So it’s with noted trepidation that we would endorse any of the recent predictions as having a good chance of being accurate.
Our investment management team is made up of engaged thought leaders. Get their latest commentary and stay informed of their frequent media interviews, all delivered to your inbox.