Ottawa Investment Advisor John Bruce

July 2013 Client Letter

July 15, 2013

After more than four years of trying to boost its economy through extremely low interest rates and other measures, the U.S. Federal Reserve declared a tentative victory in the second quarter of 2013. Cheered by strong jobs and housing data, Fed Governor Ben Bernanke suggested that it may begin to scale back its massive bond-buying program, known as quantitative easing, later this year and allow interest rates to rise in 2014.

However, global capital markets reacted to the Fed’s move with a sharp drop in prices as the second quarter drew to a close. Concerns about a credit crunch and slowing growth in China contributed to the pullback. Government bond yields rose sharply, with the yield for the 10-year U.S. Treasury bond climbing to its highest level in more than a year. Prices for high-yield and investment-grade corporate bonds and real estate investment trusts also moved lower as investors became more concerned about valuations. Prices for many commodities, including oil, copper and other base metals, were weighed down by the outlook for  Chinese growth. And gold, which many investors held as a hedge against inflation or market volatility, lost more than 20% of its value during the quarter.

For many stock markets, the drop in June was not enough to offset earlier gains. U.S. equities as measured by the S&P 500 Index finished the second quarter with a rise of 6.5% and most European bourses also managed modest increases in Canadian dollar terms. Japan’s stock market continued to benefit from central bank efforts to inflate the country’s economy and boost exports, finishing the three months 8.4% higher. Emerging market equities, however, were dragged down by the prospect of higher U.S. interest rates, China concerns and weaker commodity prices. The resource-heavy Canadian market, as measured by the S&P/TSX Composite Index, shed 4.1% and Australia’s market lost 10.8%.

For the first six months of the year, the S&P 500 in the U.S. was up an impressive 20.3%, while the MSCI World Index, representing global stocks, was up 14.9%. (As these returns are in Canadian dollars, they also reflect a decline of more than 5% in our currency relative to the U.S. dollar over that time.) Meanwhile, the Canadian market continued to lag, returning -0.9% over the six months.

Bond markets did not fare as well as stocks in the first half of the year. Thanks to rising yields, the DEX Universe Bond Index declined 2.4% during the quarter and 1.7% for the year-to-date.

The reaction to Bernanke’s comments seemed counter-intuitive, as market moves often are. He was acknowledging that the U.S. economy has made great strides since the financial crisis of 2008, making monetary stimulus less necessary. The positive trends in the economy, including low inflation, healthy corporate earnings, improving employment and the surprising strength in housing, are factors that should support U.S. capital markets. And although other regions, including Europe and China, continue to work through structural and financial issues, business conditions remain accommodative and global credit markets are functioning well.

As we have seen this year, both market declines – and gains – are unpredictable in the short term. I continue to believe the best strategy for investors is to take a long-term view, investing with care in a portfolio that is well diversified by asset class, geography and industry sector and which suits your tolerance for risk.

If you have any questions about your portfolio results or your overall financial plan, please do not hesitate to contact my office. In the meantime, I hope you and your family have a safe and happy summer.


John S. Bruce

Senior Investment Advisor

This letter was taken  from CI Investments.  The information in this letter is derived from various sources, including CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bank of Montreal Economics, and Trading Economics. Index information was provided by TD Newcrest and PC Bond. This material is provided for general information and is subject to change without notice

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des épargnants.

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