Thackray Market Letter - January 2014
Market Update
by Brooke Thackray, Alphamountain Investments
The year 2013 was a strong year for the S&P 500, producing a gain of 29.6%, and not so strong for the TSX Composite which produced a gain of 9.6%. The same phenomenon of the TSX underperforming occurred last year and the year before. In fact, the last time the TSX Composite outperformed the S&P 500 was in 2002. Canadians must be getting a complex.
Many Canadian investors feel that it must be Canada’s turn to perform well— saying, “we deserve it.” Unfortunately, investing does not work that way. It is totally possible that Canada underperforms once again. Canada’s outperformance is largely dependent on outperformance of gold and oil. These sectors represent a much bigger percentage of the Canadian stock market compared with the U.S. stock market. Canadian banks also have a larger weighting in the market index compared to the U.S., and although the differential is not as big as oil and gold, Canadian banks can help with outperformance.
The Canadian stock market will outperform not because it is Canada’s turn, but because the constituents of its market are outperfoming. From a seasonal perspective, it is important to focus on the sectors of the Canadian market that tend to outperform at different times of the year. Overall, the TSX Composite has the highest probability of outperforming the S&P 500 in the fi rst four months of the year.
In recent months, we have had fairly strong US employment reports, that is up until Friday January 10th, when the US Economy added just 74,000 compared with an expected 197,000. The harsh December weather probably had an impact, but nevertheless Friday’s employment report was a lot worse than expected.
Although this is only one employment report, if the next one or two numbers are also poor, then the market might start to run into trouble. Right now, the bad news is not so bad because it means that the Fed may delay its tapering. If weaker than expected economic numbers continue, then investors will turn their focus to the impact of a weaker economy instead of the Fed delaying tapering. We have just entered the earnings season for January.
The S&P 500 Q4 earnings are expected to grow at 7.7%, while revenue is expected to have grown at 0.4% (Thomson Reuters). After Alcoa’s miss last week to kick of the earnings season, we have a number of big banks reporting this week, including JPMorgan & Chase, Wells Fargo on Tuesday, Bank of America on Wednesday, Citigroup and Goldman Sachs on Thursday and Morgan Stanley on Friday. If the banks come out with positive earnings and the market moves forward, this will be positive. When the US fi nancial sector is one of the top performing sectors, this tends to provide support to the market as is the case currently.
Although we are in the six month favorable period for stocks, February can be a weak month. From 1950 to 2012, the S&P 500 has produced an average loss of 0.1% and has been positive 54% of the time, making it one of the weaker months of the year. Nevertheless, it is not necessarily prudent for seasonal investors to radically shift their portfolios to cash in the favorable time period for stocks (October to the beginning of May). Although investors should act in a conservative fashion, any downdrafts should be seen as a chance to enter favorable sectors at better prices.
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