S&P 500 shows best monthly gain since October 2011. All equity markets in the black. Bonds post losses.
2013 started out very well with all major equity markets in positive territory. The S&P/TSX Composite Index gained 2.25% during the month, but lagged its global brethren. The S&P 500 gained 5.73% in Canadian dollar terms, while the MSCI EAFE Index rose by 5.74%. In fact, the S&P 500 had its best month since October 2011 and it was its biggest January gain since 1997.
In the U.S., much of the rise was justified after lawmakers reached an agreement to avoid the fiscal cliff and agreed to push back the debt ceiling talks until at least May. This buoyed investor sentiment and allowed them to focus more on the fundamentals, which showed that the economy is continuing on its slow growth trajectory.
Globally, it was again Europe leading the charge as signs of life are slowly returning to the region’s moribund economy. Manufacturing activity was moderately higher, inflation moderated and the jobless rate remained stable. These factors combined to give investors reason to cheer.
In China, all economic news appears to be pointing to a sustained recovery. Real estate prices, industrial purchasing activity, and commodity prices painted an increasingly positive picture. Add to that growing import export activity and modest inflation, it appears that there may be reason for cautious optimism in the region.
In Canada, it was technology, healthcare, and industrials leading the way higher, while gold companies muted the overall gains.
With bond yields pushing higher, Canadian bond prices fell during the month. The DEX Bond Universe was down by 0.7% with long bonds and real return bonds bearing the brunt of the losses. This is not surprising when the yield on the benchmark 10 year Government of Canada bond rose from 2.36% to 2.57% during the month. Real return bonds were hit hard after recent inflation numbers were better than expected.
Despite the great start to the year, there are still many macro issues that need to be addressed. The U.S. may have averted the fiscal cliff, but they basically kicked the debt ceiling can down the road. This will eventually have to be dealt with and should either side dig in their heels, it could result in extreme uncertainty and very rocky markets. We don’t expect too much activity on that front for at least the next few weeks until, the deadline for talks approaches in mid May.
Europe, while showing signs of life is still a long way from full recovery and many countries are still dealing with crippling debt and growth stifling austerity measures. Until these can be addressed, we don’t expect significant growth out of the region. We are cautiously optimistic on the news coming out of China. If the recent trends remain in place, that will bode well for the emerging markets, and should be modestly positive for the Canadian economy.