First half of 2012:
Slowing growth with a moderate outlook
After climbing steadily over the first three months of the year, the benchmark S&P/TSX Composite Index has drifted lower since March. With growing strength in the US and emerging economies, the market had moved higher on rising commodity prices. But with the European governments unable to solve ongoing problems surrounding sovereign debt, it triggered an economic slowdown across the continent which had a negative effect on markets around the world, including the S&P/TSX Composite which by June 15 had given up most of its gains.
There were bright spots. The Canadian economy created 140,000 jobs in the opening months of the year, the most in 30 years, which lowered the unemployment rate to 7.3%. Canada’s economic strength was reflected in the dollar which traded close to or above par against its American counterpart. The loonie’s strength was supported in part by growth in the US in the early part of the year and strong oil prices which rose above $100 a barrel before falling back. As well, the dollar was underpinned by the resilience of the Canadian banking sector which has avoided many of the fiscal issues facing banks in other countries.
Slow growth with low inflation
While Canadian economic growth has slowed, Canada’s fiscal position was also buoyed by low inflation which trended slightly below 2% over the first six months of the year. If inflation had run over 2%, the Bank of Canada’s threshold, Governor Mark Carney would have been forced to raise the overnight lending rate from its current historic low of 1%. By leaving the rate where it is, Carney acknowledged that with European debt problems unresolved, low rates are needed to keep the Canadian economy growing.
The European debt issue will continue to cast a cloud over world markets in the coming months. But European governments are progressing toward a resolution of the problem. German Chancellor Angela Merkel would like to see further fiscal integration in Europe to help prevent similar problems in the future. And the EU pressed ahead with plans to pump billions of Euros into financial institutions across the continent.
Emerging markets continue to grow
The integration of the world economy also helped support growth, which is expected to run in the 3% range worldwide this year. And while Europe accounts for nearly 20% of world GDP the slowdown there was offset by growth in the US and emerging market economies in the first quarter of the year. But with the weight of the European downturn hurting global growth over the last three months, governments are now taking steps to stimulate their economies. Most notably, in June China cut its key lending rate for the first time in four years, a move that was seen as a positive for global growth and the stock markets moved higher on the news.
While many events contributed to market volatility over the first six months of the year, it is important to remember at times like these that markets move in cycles. The good news for investors is that historically, market up cycles last longer than down cycles. In fact, when Mackenzie crunched the numbers all the way back to 1956 it found that bear markets on the S&P/TSX Composite lasted only 9 months with an average loss of 28% while bull markets lasted 46 months with an average gain of 121%. And that’s why many financial advisors recommend that investors hold a diversified, balanced portfolio that includes a mix of stocks and bonds to carry them through both good and bad markets.