Market Update May 2015
Despite a bit of selling off early on, May was a relatively stable month in both equity and bond markets. After the volatile start to 2015 in the first quarter, and with larger macroeconomic headwinds on the horizon, some stability is not unwelcome. Equities held their ground despite global concerns. Investment grade corporate and government bond prices held steady, while high yield bonds and REITs underperformed.
Canadian equities were slightly down. The Canadian economy shrunk in the first quarter of 2015 mainly due to effects of the slump in oil prices. The price of oil now hovers around $57, having reached $62 – a high for 2015 – earlier this month. Despite this, the Bank of Canada held rates at 0.75% and also left its outlook on the Canadian economy unchanged. The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar.
We saw that the U.S. economy slowed to a crawl in the first quarter of 2015, weighed down by weaker trade performance, falling business investment and still-cautious consumers. However, a sluggish U.S. economy did not stop equity markets from rallying. The Dow and S&P500 reached record highs once more.
Looking ahead to the summer months, in which trading volumes are typically lower (leaving the markets more susceptible to headline driven movements), the fragility of the European Union remains a concern. The world is watching Greece as its debt payment deadlines quickly approach. Despite reassurances from Christine Lagarde that a “Grexit” will not lead to the collapse of the EU or the Euro currency, equity markets remain on shaky grounds. In the UK the Conservative Party was elected to a majority government and as part of their campaign they promised an “In/Out” referendum before 2017 on Britain’s EU membership. This has cast a shadow of doubt for businesses in the UK and across Europe, who are struggling with business and investments decisions in this climate of uncertainty. There have been requests for the referendum to be brought forward to reduce the period of uncertainty and some companies have started evaluating their options should a “Brexit” occur.
As the market prepares for an anticipated Fed rate hike later this year, REITs have underperformed over the past few months. This has been exacerbated by investors capitalizing on profit-taking in early 2015 following big gains in 2014. Analysts at Credit Suisse remain bullish on REITs and feel that many still offer a compelling valuation at current prices.
A low growth Canadian economy, helped by stable oil prices and a stronger Canadian dollar resulted in Canadian equities finishing slightly down for the month. In spite of numerous global concerns, US and global equities showed only minor change. The S&P 500 was up 1% while the MSCI EAFE was down 1%. Although investment grade corporate bonds and government bonds were flat, high yield bonds were down 2%. Overall, our balanced portfolios ended the month up slightly.
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