WEALTH Matters ó SUMMER 2013

The Bernanke Scare of 2013

In late May, the U.S. stock market reached an all-time high gaining back all of its losses from the 2008 Financial Credit Crisis. From the start of the year, the U.S. and global markets posted double-digit returns. Then, at a press conference in May, Federal Reserve Board Chair Ben Bernanke made a suggestion that a stronger outlook for U.S. economic growth would lead to a gradual reduction in bond purchases that had helped keep interest rates low. Following the Fedís May meeting, Bernanke further remarked that the slowing of asset purchases could even begin this year. The result was a sell off in both equities and government bonds and an increase in volatility across all asset classes. The U.S. 10 year treasury bond yield rose from a low of 1.62% at the beginning of May to 2.49% by the end of June. The prospect of an end to the record-low interest rates shocked markets, leading to declines in the next six weeks of 4% in the U.S. and 8% in global markets elsewhere.

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The Bernanke SCare of 2013

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Below is a chart of equity market performance from the start of 2013 up to Bernankeís first remarks in May.† As can be seen from the chart, what followed was a big pullback in markets across the globe.

The dramatic shift in markets indicates that many investors were placing a high importance on U.S. monetary policy to drive equity markets. The reliance on the continuation of easy monetary policy is not healthy for markets. The slowing of asset purchases is conditional on an improving U.S. economy. Thus, the Fedís statement just might be interpreted as a positive sign that the economy is becoming healthy enough to stand on its own. The Fed has not actually given an end date to the monetary policy and it may be further away than expected. These events in the U.S. have of course spilled over into Canada. While Canada continues to struggle with its large exposure to the resource sector which has been badly beaten, the Fedís announcement created a sharp sell off in Canadian REITís (Real Estate and Investment Trusts) with prices dropping by an average of 10% as investors fear both rising borrowing costs and poorer relative returns in the coming years.

Some positive things worth noting in the first half of 2013:

 Even after the pullback in the equity markets in response to the easing in the Fedís monetary policy, U.S. markets are still up 14% and global markets outside the U.S. are up 10%. Had anyone one suggested these double digit returns at the beginning of the year, as an equity investor you would have been thrilled.

 The strength of the U.S. is a continuation of the trend that started 3 Ĺ years ago. Since the beginning of 2010, the U.S. market is up 32% while global markets outside of the U.S. are up 14%.

 Even with the continuing headlines about Cyprus, Greece and Portugal, European markets have reported solid gains in the first half and will be continued to be driven by the larger economies versus the ones dominating the headlines.

This is not to say that the U.S. does not still face some serious issues such as political dysfunction, national debt, burdensome regulation, unemployment, and a housing sector that is continuing to heal.

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The Globe and Mail, Canadaís leading national newspaper published a article on June 15, 2013 that was titled The Star Spangled recovery. The article listed many positives the U.S. had going for them:

 Improvement in budgets and government deficits

 Decreasing jobless claims and actual job growth

 Growth in housing prices and housing starts

 Consumer spending

As the article mentions, this is far from an economic boom but it is getting harder and harder to argue that this recovery lacks staying power. As we look forward, there is a strong case that this recovery will fuel economic growth around the world. As China continues to slow, the spotlight is now back on the U.S as the driver of global growth.

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2013 performance

U.S.

Europe

Emerging Markets

World Markets ex U.S. 

Jan 1 to May 21

18%

16%

3%

19%

May 22 to June 30

       -4%

-8%

-7%

-8%

First half of 2013

      14%

7%

-4%

10%