2016 is now in a bottle.
The first trading day of the year was the worst on record since 2008 but rather than being due to fundamental issues, it was heavily predicated on the new structures put in place by the Chinese government in an attempt to quell the volatility in their stock market. It was expected that many shareholders who were restricted from selling shares since last summer were expecting to have that restriction lifted. That is now no longer the case. Coupled with that, the government minted a new process that halts the stock market for 15 minutes after a 5% drop and closes the market entirely after a 7% drop. Well, if the market drops 5% and you know that it’ll close if it drops another 2%, what might you do? Sell! This highly predictable behaviour is exactly what happened, pushing the markets to a halt on the day.
Interestingly, despite the lower growth in China and the volatility in world markets on the first trading day of the year, commodities appear far more resilient than one might expect. I see this as an indication that they have been pushed farther below the fundamentals. Also, the U.S. has been a stock safe-haven this year, with returns being delivered by the currency alone. Carefully selecting low beta, high dividend Canadian underdog stocks will likely deliver better opportunities this year than the few tech and pharma stocks that drove most of the returns last year.
This year will continue to be a stock-picking market. Passive investors will likely be disappointed again by holding the broad market.
For those traveling to the U.S., you’d be hard pressed to find anyone with good news on the dollar. As the Saudi and U.S. government fight over oil production and market share the price of oil has been maintained at low levels, resulting in significant earnings cuts on oil companies across the board. In December, Stephen Poloz, head of the Bank of Canada, suggested that he felt that other areas of the economy have strong enough growth to pick up the slack but the commentary is leaning toward continued easing, which translates to lower interest rates rather than higher. That’s a thesis that we will see unfold over the coming months but the likelihood is that the Canadian dollar will drop further before you can expect it to rebound.
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Happy New Year!
Looking back on 2015, there is only one thing you can say: “It was the year of the Bear!” S&P/TSX dropped from 14,632 to 13,009 (down 11% and over 18% drop from its peak) while the S&P dropped 1% over the year; the Canadian Dollar fell from 86 cents to 72 cents (down -16%); crude oil tumbled from $53.27 to $37.04 (down 30%); and even gold slipped from 1,184 to 1,060. The only reason that the asset allocation models show positive comparison returns was due to the amount allocated to U.S. cash!
Tax Money in Your Pocket
For all portfolios, we took advantage of the tax loss selling season by moving between similar securities and repositioning in order to sell low, buy low and reap a tax loss. Tax losses can be carried back to any of the three prior tax years to reclaim money paid on capital gains. Most of our clients who paid capital gains in 2014 will be able to file an amendment and have money paid last year returned to them. You will be receiving a ‘Realized Gain/Loss’ report in the next few weeks, as part of your tax package with details on what you will be able to claim on your taxable accounts.