WEALTH Matters — SUMMER 2011


Investor confidence in the global economic recovery was put to the test over the second quarter of 2011. Weaker-than-expected economic data from the U.S. and a further deterioration in the Eurozone’s sovereign debt crisis led to a general flight to safety that drove equity markets lower and kept many investors on the sidelines.



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Since the 1999, the S&P/TSX has had 43 corrections of over 5% and 15 over 10%. Typical corrections are healthy pullbacks that clean up overstretched markets and position them to resume their gains.

To put this decline in perspective, the S&P/TSX had surged 90% from the March 2009 market low to the end of the first quarter of 2011. Prices for fuel, food, and other commodities have risen dramatically as the global economy recovered, contributing to higher inflation in many emerging markets. Central banks and governments in developing countries have taken steps to cool their heated economies, leading to lower commodity prices, which then affected the commodity-driven Canadian stock market.

Of particular concern were disappointing U.S. GDP growth and persistently high unemployment numbers. After an annual growth rate of 1.9% in the first quarter, the U.S. economy hit a “soft patch” which could see second quarter GDP growth well below 2% - insufficient to improve the U.S. unemployment rate, currently at 9.2%. As well, supply chain disruptions from the Japanese tsunami and earthquake contributed to lower than anticipated manufacturing in North America. Continued monetary policy tightening in China and other emerging markets dampened global growth predictions and expectations for resources demand. Finally, the growth of the U.S. government debt and the political haggling to raise the debt ceiling so the U.S. Treasury could meet its debt payments has given the second quarter slowing trend momentum into the third quarter.

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U.S. stocks fared much better despite the slowing economic recovery. U.S. corporations expect to report another quarter of strong earnings highlighting the ongoing difference in the improvements seen in the U.S. corporations and the U.S. economy. Combined earnings of companies with the S&P 500 index are forecasted to increase 12.6% from the previous year’s second quarter. For the quarter, the S&P 500 index was down minimally by 0.7% but up 2.8% on the year in Canadian dollars. In the first quarter of 2011, the S&P 500 index had its best first quarter since 1998 posting a gain of 5.9% (3.5% in Canadian dollars). Based on data since 1928, when the S&P 500 index gains between 5% and 7% in the first three months of the year, it has climbed a further 7.1% on average over the rest of the year.

By mid-June, Canada’s S&P/TSX Composite index had experienced a technical correction – broadly defined as a decline of 10% or more. However, by the end of the quarter, Canadian stocks rebounded and the overall loss shrank to 5.2% for the quarter and a slight gain of 0.2% for the year (blue area in the graph - excludes reinvested dividends).


Overseas markets were mixed as the MSCI EAFE Total Return index was up 1.3% in Canadian dollar terms, while the MSCI Emerging Markets index was off 1.8% as investors shifted out of more volatile assets. Developed markets especially in Europe were dampened by concern over government debt levels in Greece and to a lesser extent of Portugal, Italy, Ireland and Spain. China GDP growth slowed but still delivered an impressive 9.5% growth rate.

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