Download Winter 2015 - RBC Wealth Management

Winter 2015
Written and compiled by Catharine Bayles
Last year was a good year with the S&P/TSX returning 10.6% including dividends and the Dow
Jones returning10% including dividends. Last year was also the year that volatility returned to the
market after a few years of relative tranquility.
Mid-year 2014, the US Federal Reserve announced that October would mark the end of their
bond buying program and interest rates could start to rise as early as 2015. The US economy
was (and is) in a decent recovery with unemployment as low as 5.6% (less than anticipated), the
auto sector in full recovery and selling more cars than before the great recession and housing in
an uptrend.
Volatility . . .
About the same time oil prices began to weaken. Since then, oil has dropped by almost 60%.
Outsized moves have also occurred in the US dollar, the Canadian Dollar and other world
currencies and the whole commodity complex. Interest rates have not gone up – they have
dropped massively and in some countries they are negative. For example, the current return on a
German government bond is -0.16%.
The world press has concentrated their reporting on the collapse in the price of oil and its
possible effects. This is analyzed daily in the newspapers and on TV. However, this must be
considered along with the extreme volatility in other sectors as well. Very likely something big is
going on and no one seems to have a handle on it just yet.
We in Canada seem to be concerning ourselves with the collapse in energy prices and the
negative effects on the Canadian economy. It will certainly enter into politics as we enter an
election year! But the news is not all that bad. The recovery in the US, our biggest trading
partner, is good news for Canada.
As oil prices settle at lower levels, costs associated with manufacturing and many other activities
will decline. Look around your house - much of what you see from the paint on the walls to all the
plastics, is derived from oil and gas. Individuals will benefit from lower gas prices and spend
more elsewhere. This could be the incentive for companies to finally boost investment in new
plants, equipment and labour. It could be financed by the record high levels of cash sitting on
corporate balance sheets.
These developments are good news for the next 10-20 years in my opinion. However this does
not mean we can cease to be careful! I will remind everyone we have not seen a correction of
any magnitude since 2011 when the market declined 22% from its high of that year. As the world
adjusts to the new price levels of commodities, currencies and energy, we will experience more
volatility in the near term and the effects of these changes are not fully known at this time.
Long term averages . . .
To put volatility in perspective, on the S&P 500 Index, every calendar year since 1980 has seen a
pullback, with maximum declines ranging from -3% in 1995 to -48% in 2008. Yet, each year the
market has ended above its maximum decline and there have only been seven negative calendar
year returns and average annual returns over the period were 10.1%. On the S&P/TSX, there
have only been 10 negative calendar year returns in that period and average annual returns over
the period were 7.4% (RBC Global Asset Management).
In summary . . .
It is important not to make drastic decisions in reaction to the current outsized moves in
currencies and commodities. Weathering the bouts of volatility that come with investing in publicly
traded companies is necessary for success. It escapes me who to attribute the following words to
but they are quite true: “Time in” the market not “timing the market” is the key to successful long
term investing.
As always, I will act prudently on your behalf.
Cathy Bayles
Portfolio Manager
.
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