WEALTH Matters — Winter 2010-2011

INVESTMENT MARKET COMMENTARY

The year 2010 turned out to be a good year for equity and bond investors alike. It was the first time since 2005 that stocks, bonds, commodities and the dollar all rose in the same year.

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EquitiesThe chart shows the Canadian TSX60 (blue) and US S&P500 (red) indices over the past 10 years. The Canadian index is up 17.6% for the year and is within 25% of it’s 2008 peak. The US S&P500 index is up 11.2% in Canadian dollars, despite the 3% rise in the value of the Canadian dollar. The US index is within 20% of it’s 2008 peak. The MSCI World global stock index is up 8.7% in Canadian dollars, led by Asia with a 14% gain despite a 14% decline in China. Such high growth rates are typical of a post-recession recovery year.

CONSUMER DEBT AND MORTGAGE RULE CHANGES

Interest Rate Trends

Investment Market Commentary

Case Study—LONG TERM CARE COSTS

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Fixed Income – North American and European interest rates stayed low throughout the year. Risk premiums on corporate debt continued to drop from average 2009 levels, enhancing bond prices, but corporate yields are still 0.5%-1.5% higher on average than the yield on government debt(see the chart). Late year equity market gains and improving consumer spending rekindled inflation fears and depressed prices somewhat. The US Federal Reserve continues its Quantitative Easing, which should reduce government bond yields and encourage investors to seek higher returns in corporate debt. While concerns remain about European sovereign debt, they are much less acute than in 2010. China has recently been buying Spanish bonds, confirming its confidence in the weaker Eurozone countries. A common view is that corporate investments offer a better return expectation than government bonds per unit of risk.

2010 started strong but was set back mid year with concerns over European national debts. Early expectations of rekindled inflation were soon quashed by poor job gains in the US. While US unemployment remains high near 9%, corporate profitability is high, vehicle and durable goods orders are strong and growing, signaling continued strength in equities there, while strong global commodity prices continue to help the Canadian stock market. Many analysts are raising their economic growth and market growth forecasts. The chart shows 2010 actual and 2011 forecasted growth in corporate earnings per share in various regions – all in the double-digits. Investors should expect continued volatility as market sentiment at times becomes over-optimistic and then settles back to more reasonable levels. 

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