After a promising start in the first quarter, capital markets became increasingly volatile in the second quarter, as Europe’s debt crisis escalated once again and weaker global economic activity caused investors to take a more cautious tone.
In the Eurozone, Greece and Spain were among the chief sources of investor concern. Worries that Greece, which continues to struggle to meet its debt obligations, might make a disorderly exit from the monetary union persisted until general elections provided some stability in mid-June. On the last day of June, Eurozone leaders reached an agreement that included providing funds directly to struggling banks, rather than funnelling it through member governments. The deal was seen as a very positive development, especially for Spain and its troubled banking system, and prompted a rally on global stock markets.
While the pace of growth in emerging economies continued to moderate, it remained relatively strong, with China’s economy growing at an estimated 7.5% annually. The Chinese central bank cut interest rates in the second quarter to ensure that this growth rate is sustained.
U.S. growth remained positive, but also slowed in the quarter. One explanation was that the unusually warm winter resulted in significant economic activity taking place earlier than normal – resulting in a stronger first quarter and a weaker second quarter than had been expected. Prices for commodities such as oil and copper dropped in response to the slowdown. The U.S. Federal Reserve, acknowledging the need for continued economic stimulus, extended its “Operation Twist” bond purchase program to the end of the calendar year. Canada also continued to experience modest economic and employment growth.
The renewed uncertainty once again led investors to seek security in higher-quality government bonds, and yields for 10-year U.S. and Canadian bonds dropped to record lows. Several major equity markets lost ground for the period, including Canada’s, which is heavily weighted toward commodity producers and financial services companies. The benchmark S&P/TSX Composite Index declined 5.7% for the quarter and was down 1.5% for the first six months of this year.
The U.S. equity market remained a bright spot, with the S&P 500 Index declining just 0.8% for the quarter and gaining 9.4% for the year-to-date (in Canadian dollars). This reflects America’s relative stability and the strength of U.S.-based corporations. This helps to remind us that, through the funds in which you have invested, you are buying ownership stakes in individual companies – not markets – and that healthy, profitable and growing companies abound today, despite the gloomy headlines.
The challenges for investors are likely to continue for several months as developed and emerging economies tackle their complex fiscal issues. Although the global economic recovery continues, capital markets remain sensitive to every piece of news.
For that reason, I believe the best strategy is to take a long-term view, investing with care in a portfolio that is well diversified by asset class, geography and industry sector and which suits your tolerance for risk.
If you have any questions about your portfolio or your overall financial plan, please do not hesitate to contact me at 403-266-2061 ext. 2207. Thank you for your business and I hope you and your family have a safe and happy summer.
The information in this letter is derived from various sources, including CI Investments, Signature Global Advisors, Globe and Mail, National Post, Wall Street Journal, Bloomberg, Bank of Montreal Economics, Trading Economics, and the Big Picture. Bloomberg is the source of the index information in paragraphs 5 and 6. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.