Market Update March 2015
March comes in like a lion and goes out like a lamb. U.S. equities began the month with a roaring start. The S&P 500 set another record high and the Nasdaq crossed 5,000 for the first time since the dotcom heydays 15 years ago. However, this was short lived and looking back March was a very volatile month – not just for equities, but all asset classes.
Continued low oil prices, a strong U.S. dollar, low growth, profit taking, potential U.S interest rate increases, discussions on a nuclear deal between the U.S. and Iran, and increased tensions in Yemen all contributed to the irrational and volatile markets we observed.
The Bank of Canada (“BoC”) held the target overnight rate at 0.75% citing that growth is in line with expectations and that recent monetary actions have eased financial conditions and are expected to boost growth through stronger non-energy exports and investments. The BoC also expects the negative impact of lower oil prices on the Canadian economy to present itself in the first half of the year, with BoC governor Poloz going so far as to warn that the impact is “atrocious”.
When the Federal Reserve met mid-March they referenced a growing U.S. economy with better job numbers. Although “patient” was dropped from the official statement signaling a potential future interest rate increase, Fed chair Janet Yellen said, “An increase in the target range for the federal funds rate remains unlikely at the April meeting.” Their cautious approach is needed as U.S. wage growth, housing, industrial production, and consumer spending have been weaker than expected.
The U.S. dollar is enjoying its fastest rise in 40 years. Over the past eight months, the U.S. dollar has strengthened dramatically against all the world’s other major currencies. We have seen the Canadian dollar fall to below 80c and the USD approach parity with the Euro.
The rising U.S dollar negatively impacts the earnings of U.S. companies with large foreign operations, cuts the dollar value of international revenues, and is a drag on earnings. However, a higher dollar effectively transfers demand from the U.S. economy to economies around the world. With slowing and stagnant global economies, this may be a welcome development. We have observed our international equity position XEF increase 16.4% this year.
U.S. real estate investment trusts (REITs) are still firmly in the lead among the major asset classes. The Vanguard REIT (VNQ) has gained a hefty 22.6% on a total return basis in the last year.
The fall in the price of oil hit Canadian equities hardest with the TSX Composite now down 2.2% and having experienced a larger decline of 4% earlier in March. Although our portfolios declined this month, the magnitude of the drawdowns was muted by the good performance of foreign stocks and domestic bonds.