Market Commentary – Fourth Quarter 2015

Markets were largely influenced in the fourth quarter by three factors: concerns over the level of global economic growth, lowering commodity prices, and the effect of the U.S. Federal Reserve raising interest rates. Commodity prices dropped largely due to slowing growth and oversupply in some areas. The price of oil continued its decline (30% drop in 2015) which especially hurt oil-exporting countries like Canada. This largely contributed to the continuing drop in the Canadian dollar to $0.72 in U.S. dollars at year-end, which was its lowest level in over 12 years. One positive aspect of the lower Canadian dollar was that this translated into higher returns on unhedged foreign equity investments.

The Canadian stock market returned -1.4% in the fourth quarter and was down 8.3% for the one-year period. The Energy sector (18.5% of the index) fell 1.6% in the fourth quarter and returned -23% over the one-year period due to the continuing decline in oil prices. The Materials/Mining sector was down 21% for the year reflecting the drop in metal prices. The Health Care sector fell 37% in the fourth quarter primarily due to one large stock (Valeant) that dominates this sector. This was due to several negative reports on the company’s billing and pricing practices.

U.S. equity returns (S&P 500 index) were positive (11%) in the fourth quarter in Canadian dollar terms and returned 7% in U.S. dollar terms. The Canadian dollar’s large depreciation versus the U.S. dollar continued in the fourth quarter and this has boosted Canadian dollar returns to 21% (versus 1.4% in U.S. dollar terms) over the past year. The U.S. continues to be one of the few countries with positive economic news. Global equities were also positive (9.3%) in the fourth quarter and were up 18.9% for the year. The European stock index returned 6.2% in the fourth quarter and was up 16.5% over the past year largely due to the European Central Bank’s continuing stimulative monetary policies. Emerging market returns trailed most developed markets and were positive (4.4%) for the quarter but were up only 2.4% for the year.

The Canadian Bond market returned 1% in the fourth quarter and 3.5% for the one-year period as disappointing domestic economic growth continued. This low growth led the Bank of Canada to forego any potential increase in interest rates. Real Return Bonds were up 0.7% in the fourth quarter and returned just 2.8% over one year. High Yield Bonds had the weakest returns of the bond sectors at -2.5% in the fourth quarter due to both credit and liquidity concerns. Inflation (as per the Consumer Price Index) remains very low at 0% in the fourth quarter and is up only 1.4% over the past year.