February Market Update 2016
The volatile start to the year continued into the beginning of February until markets started to stabilize. Global markets appear to be moving in step with crude oil. The price of crude tested a market low before rebounding on news of an agreement between major oil producing countries.
Although equity markets finished the month flat, we saw them react to the price of oil. Crude fell sharply to $26 at the beginning of the month before steadily rising. The rebound was on the back of an announcement between Saudi Arabia and Russia agreeing to hold production levels to control supply and stop the free fall in price, provided other producers followed suit. Due to the composition of companies that make up S&P/TSX Composite we often expect a high correlation between stocks and oil. However outside of Canada, in more diversified global markets, such correlation to commodities is often an exception. Lower commodity prices translate into lower costs and higher earnings for all non-commodity focused business, and higher earnings translate into higher stock prices. The exception is a slow-growth environment which would be cyclical.
The European Central Bank announced it will review its Quantitative Easing program as the desired results have not been obtained, it remains concerned over increased market volatility and may make adjustments to both the size and restrictions of its bond buying.
Global financial leaders at the G20 meeting in Shanghai last week failed to deliver a coordinated plan to stimulate the economy. This lack of direction led to market woes as stocks slipped in Asia following the meeting.
At home, the S&P/STX Composite ended the month flat. Market headwind came from strong earning results in the financial sector, recovering oil prices in the energy sector, and gold leading to increases in the mining sector. However, our economy remains fragile, stats Canada stating that 2015 growth numbers were the slowest since the 2009 recession.
The Bank of Canada will meet next week to unveil any necessary measures and the Federal government will deliver its budget to strengthen the economy later this month.
We remain vigilant of the high yield market. The level of risk is high, signaling that potential for defaults has increased, and liquidity is scarce and spreads are at levels seen in 2008. Concern surrounds US shale oil companies that have been suffering due to the price of oil. The remainder of the market remains attractive and analysts see opportunity as the market is priced as if the US is going into a recession but they do not believe this to be the case.
Canadian REITs, despite the contraction in Alberta and across Office and Retail sub-sectors, continue to present value as low-interest rates in Canada continue. We expect outperformance in Multi-Family, Senior Living and Industrial sub-sectors.
It is important to remember periods of high volatility and market declines are part of regular market cycles – they have happened in the past and will happen in the future. These are the times when it is most important to maintain a disciplined and diversified investment strategy, to hold steady throughout the market cycles and to avoid panic.
Have questions about your WealthBar portfolio? Just login to your WealthBar dashboard to review your portfolio’s performance and to talk to your advisor. Not yet a client? Sign up here and receive a complimentary online personal financial planning session with one of our expert financial advisors.