In 2015, the leading North American stock market indices broke a 6 year rally from the lows of March 2009. The S&P/TSX Composite index had been growing uninterrupted for three years from 2012 to 2014, while the Dow Jones Industrial Average Index (DJIA) and S&P 500 indices had been rising almost uninterrupted from March 2009 to December 2014. In 2015, while the leading US indices dropped by 1%-2%, the leading Canadian index, S&P/TSX Composite, fell almost 12% (see the table). This was due to weak commodity prices, as indicated by the 26% fall in the Bloomberg Commodity Index Total Return during 2015. Much of this was driven by weak energy prices, which have a 25% weight in the S&P/TSX Composite index.
The first six weeks of 2016 has seen the slump in market indices continues. In fact, the weakness of the markets at the beginning of this year was a little unexpected, where market followers have compared it to the worst times of the 2007-2009 financial crisis. According to forbes.com, the decline in early January 2016 was the worst start of the year ever for the Dow Jones Industrial Average (DJIA) index. In the past month, the markets have been moving sideways while this year to date, the S&P/TSX Composite, the DJIA and S&P 500 indices have weakened 1.5% to just over 6% (see the table).
What has led to such a difficult start for the leading stock market indices? First off, in the US, the strong market performance over the past several years indicated that some sort of pull back was inevitable. By historic standards, the stock markets rarely run up uninterrupted and many experts had called for a correction, and some type of self-fulfilling prophecy may have resulted. The first correction in four years (a correction is a decline by at least 10% from the previous high) came in August-September 2015. In early 2016, the leading US stock indices entered correction territory once again.
Another reason for the sluggish North American stock markets was the slowdown of growth in China. In 2015, China’s GDP grew by 6.9%, a 25-year low. The country’s GDP growth rate has declined steadily from 9.5% in 2011 to 7.3% in 2014, while for 1989 until 2015 it had averaged 9.9% per year. This has hurt commodity prices. As well, experts were arguing that the growth in China’s GDP last year was even lower than 6.9%, with some indicating growth closer to 4%. China's electrical power generation fell by 0.2% last year, the first annual decline since 1968, has fuelled those speculations.
Weakness in both U.S. and Canadian economies have also not helped investor confidence. The U.S. economy grew by just 0.7% in the fourth quarter of 2015. Compare this to the growth by 0.6% in the first quarter of 2015 when parts of the U.S. battled with heavy snow storms and many businesses were closed. For the whole year, the U.S. economy grew by 2.4%, at the same pace as in 2014.
The U.S. Federal Reserve raised its key interest rate in December 2015 for the first time in nearly ten years, by 0.25%, although many experts had been doubtful about this move due to the uncertain economic outlook. Doubts about further rate hikes were also quite strong for the same reason in January-February. But the stronger than expected consumer inflation in the U.S., 2.2% in the 12 months through January 2016, have created a lack of clarity on whether rate hikes should be delayed, or the expected schedule for further increases should remain in place.
The Canadian economy has been suffering due to low commodity prices. It fell into a recessionary path in the first half of the 2015, for the first time since 2009. The two-quarter slump (by -0.7% in the first quarter and -0.3% in the second quarter) was reversed in the third quarter when the economy staged a turnaround, growing by 2.3%. However, the growth lost its steam in the last month of the quarter – in September, Canada’s GDP dropped by 0.5% over August’s level. Experts are expecting a weak GDP numbers again, with growth in the fourth quarter of just +1%.
Does the Canadian stock market have better prospects for the rest of 2016 following the difficult start to the year? Bank of Canada’s officials have been discussing different kinds of policies to revive the country’s economy – shifting to negative interest rates as way to stimulate corporate and consumer spending, irrespective of the impact to the CAD. There are also discussions that Canada should move away from monetary policies alone to revive the economy, and ramp up public spending. This is in line with thinking the Liberal government has in mind through running budget deficits. Other global players are also looking at ways to improve their own circumstances (OPEC and other oil producers are talking about production cuts to get higher oil prices), which may help Canada’s stock market dynamic.
Michael Zienchuk
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204
[email protected]
www.ukrainiancu.com
Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds and other securities are not insured nor guaranteed, their values change frequently, and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.
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