While 2013 will be remembered as a very good year for most global stock markets, Canadian stocks continued to be held back by losses in the resource sectors.   U.S. stocks finally broke out of the 15-year trading range that had been accentuated by two brutal bear markets (2001-02 and 2008) sandwiched between the technology boom, the global expansion (2003-07) and the recovery from the financial crisis.  The gains from the 2009 financial crisis have been driven by both an earnings recovery as well as the most favourable monetary conditions ever by the global central banks.  Interest rates remain near all-time lows while central bankers continue to ensure investors that they will not be in a hurry to remove this stimulus and raise interest rates until economic conditions improve even further.  They are also setting goals of higher levels of inflation as a sign of this strength, something that central bankers have never supported or endorsed.  The bottom line is that monetary conditions will continue to be easy and this should be a ‘tailwind’ for the stock market.

With the final numbers in for 2013, the S&P/TSX Composite Index returned 2.0% in December, 7.3% for the 4th quarter and 13.0% for the full year.  While positive, this number lagged the gains in many other markets, including the U.S. where the S&P500 Index gained 32.4% (41.7% in Canadian dollar terms) and the Dow Jones Industrials Index was up 29.7%.  In local currency terms, the Japanese stock market showed the best gain in 2013, rising 56.7%, while the DAX Index in Germany gained 25.5%.  The MSCI Global Index of stocks was up 24.1%, driven by the gains in Germany, Japan and the U.S.  The laggards last year were the emerging markets as well as the resource-based markets such as Canada.  Brazil lost 15.5%, China was down 5.9% and the MSCI Emerging Markets Index lost 5.0%.

Canada was somewhat of a microcosm of what was happening on global stock markets.  Consumer, service, financial and technology sectors lead the advances in stock prices while the resource sectors continued to lose value on worries about economic growth in China as well as a strong flow of investment funds away from the commodities group.  While the overall stock market in Canada was up 13%, it was a basically a binary market with the consumer, health care, technology and industrial sectors each gaining over 30% while the basic materials sector was down over 20%.  The heavyweight Financial Services and Energy sectors were closer to the averages, gaining 22% and 10%, respectively, for the year.

While stocks had a strong year, the bond market suffered its worst performance since 1994.  The Canadian bond market had a negative return of 1.2% in 2013, driven in large part by the 6.2% loss for long-term government bonds.  Improving economic data and worries about an end to the extremely loose money policies of the past few years pushed interest rates higher and lead to the losses.  Corporate bonds did slightly better, rising 0.84% in 2013, as the spread between corporate and government bond yields narrowed, due both to stronger corporate earnings as well as a ‘hunt for yield’ by investors which drove them to the higher yields provided by corporate bonds.  However, this has resulted in the spread between government and corporate bond yields narrowing to the tightest level since 2007, suggesting that there is little further to be gained from taking the higher inherent risks in the corporate market.

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