What a Difference Six Months Makes

Winter 2009

From an equity investing perspective, 2008 will likely go down as one of the worst calendar years on record. Just six months ago, the Canadian market and economy appeared to be out of sync with what was happening elsewhere in the world. Not any more. Remember the concerns over rising commodity prices and possible food shortages last summer? Since then, commodity prices have fallen dramatically, perhaps none more so than the price of oil. In May of 2008 Goldman Sachs was predicting the price of oil to hit US$200 a barrel. By the end of the year, they were calling for oil to be in the US$30 range. The collapse of the commodity markets is just one of several ills that plagued the capital markets in 2008.

The tipping point for Canada appeared to come in September, coincident with several failures within the U.S. financial system. Up until then, the consensus view was that commodities were in short supply and as a result, Canada was in relatively good shape. A loss of confidence in the banking system and the drying up of credit has had a fallout globally that few would have predicted. Throughout the world there has been a re-evaluation of what constitutes risk and move to take on much less.


Although the Canadian market started off the year with some hefty losses, by halfway through 2008, it was back in positive territory and as Strategies reported in the Summer 2008 issue – “Canada bucks the trend.” Six months later, Canada had caught up with the rest of the world. For the year ending December 31, 2008, the S&P/TSX index was down 33.0%, declining 22.7% in the fourth quarter. The only positive sector within the index over the last year was Gold – up just 1% thanks to a strong rally in the last two months of the year. The key sectors that make up the bulk of the index – Financials, Energy and Materials, were down 35.8%, 35.8% and 26.5%, respectively. Metals & Mining, a subset of the Materials sector, posted the greatest decline, falling by 68%. On the more positive side, but still in negative territory, the Consumer Staples sector, which is made up of companies that provide people with essential goods and services, was down only 5.6%.

In the U.S., the S&P 500 index declined 9.8% in the fourth quarter and was down 21.9% for the year. These losses were partially offset by a rapid depreciation in the Canadian dollar against the U.S. dollar in the later half of the year. Currency changes also had a similar mitigating effect on international market returns. The MSCI EAFE index declined 7.5% for the three months ending December 31, 2008 and fell 29.4% over the year. Emerging markets followed a pattern similar to Canada, initially holding up during the first six months of the year then declining rapidly in the latter half of 2008. As measured by the MSCI Emerging Markets Free index, emerging markets were down 42% for the year.

Fixed Income

As central banks around the world eased interest rates, bonds, and in particular government bonds, were prime beneficiaries. In fact, the best performing asset glass in 2008 was global government bonds with the one-year return of the top performing global bond funds in the 40% range. In Canada, the DEX Universe Bond index was up 6.4% in 2008 and 4.5% in the last quarter of the year. Federally guaranteed government bonds dramatically outperformed corporate bonds. On a one-year basis, Government of Canada bonds returned 11.5% compared to 0.23% for corporate bonds.

Bonds have gained in popularity, as investors have become more risk averse. But the current flood of money into bonds has the potential to create what could be the next market bubble. With the yield on a 30-year bond in Canada at 3.44% on December 31, 2008, investors are betting on negligible inflation and further declines in interest rates over the next 30 years. Given the amount of stimulus being provided to the global economy, it is unlikely that inflation or interest rates will remain so low for such an extended period. Currently, dividend yields on all equity markets are higher than the yields from bonds, making a strong case for investing in dividend paying stocks, or at least holding on to the ones you own.


It wasn’t all that long ago that the Canadian dollar achieved parity with the U.S. dollar was all the news. To just about everyone’s surprise, the Canadian dollar closed out 2008 at 81.66 cents U.S., a decline of 19.3% over the year. However, the dollar at this level more accurately reflects the purchasing power parity of the Canadian dollar relative to the U.S. dollar.

With its appreciation over the year, the U.S. dollar has reestablished itself as the predominant reserve currency for the world. Against the U.S. dollar, the euro declined by 4.26% and the British pound fell by 26.54%. However, in 2008 the Japanese yen appreciated 23.17% and the Chinese yuan gained 6.98% over the U.S. dollar.


Click table in Image Gallery below to see Annual Returns of major market indexes as at December 31, 2008.
[image size=”small” lightbox=”true” icon=”zoom” align=”center”]https://www.tewealth.com/wp-content/uploads/2011/06/1271865060_What%20a%20Difference_Chart.jpg[/image]

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