Second Quarter 2011 Market Review

There were mixed results on global capital markets during the second quarter of the year. Bond prices rose, while stocks in general pulled back. Even then, markets such as Germany and Japan made gains, while China and North America were down.

The performance of Canada’s S&P/TSX Composite Index was notable in that by mid-June, it had experienced a technical correction – broadly defined as a decline of 10% or more. However, Canadian stocks rebounded at the end of the quarter, and the index registered a decline of 5.2% for the three months and a slight gain of 0.2% for the year-to-date. U.S. stocks have fared better, as the S&P 500 Index was flat for the quarter and up 6.0% for the six-month period (in U.S. dollars).

Market observers point to several reasons for the Canadian market’s lagging returns this quarter. Prices for fuel, food and other commodity prices have risen dramatically as the global economy has recovered, contributing to higher inflation in many emerging markets. Central banks and governments in developing countries have taken steps to cool their heated economies, leading to lower commodity prices, which then affected the commodity-driven Canadian stock market. Markets around the world, meanwhile, were also rattled by renewed government debt concerns in Europe and the U.S., while consumer debt and unemployment levels in developed markets remained elevated.

Despite these concerns, investment veterans such as Gerry Coleman of CI Investments’ Harbour Advisors and Daniel Bubis of Tetrem Capital Management have recently expressed their conviction that equities will continue to outperform other asset classes. These experts point out that equity market valuations remain reasonable and corporate fundamentals are healthy. The global economy, while not uniformly robust, is still supported by impressive growth in developing economies, low interest rates and strong credit markets. From March 2009, when the stock market reached a bottom during the financial crisis, until March 2011, the Canadian stock market had surged over 90%. Historically, pullbacks of 5% to 10% have been a normal part of such ongoing market advances.

In this environment, portfolio diversification – both geographically and across asset classes – provides a defence against volatility while allowing you to benefit from market growth. During the last quarter, for example, bond prices rose as equity share prices fell. The tendency of returns and risks to vary across different types of investments helps to smooth out the highs and lows in a portfolio over time.

You may have questions or concerns about your portfolio. If we can help, please do not hesitate to contact us.

- Sources: CI Investments, Signature Global Advisors, Harbour Advisors, Globe and Mail, National Post, Financial Times, and Bank of Montreal Economics. Index information was supplied by TD Newcrest (paragraph 2) and Yahoo! Finance (paragraph 4).