Market Commentary
July 2008
The worldwide credit crisis that caused great volatility in the markets last year continued to negatively impact global benchmarks in the first half of 2008. Investors have also had to contend with rising oil and food prices, along with indications of a slowdown in the influential U.S. economy. Despite these concerns, Canadian equities had solid second quarter returns and remain in positive territory year-to-date.
Canadian Market
Canadian stocks overcome volatility
The S&P/TSX Capped Composite Index gained 9.1% in the second quarter and finished the first half of 2008 with a 6.0% return - making it one of the world's top performing benchmarks. Not surprisingly, the index was powered by the high-flying Energy sector, which gained 22.9% in the second quarter on the strength of rising oil prices that hovered over the US$140 a barrel mark.
The Materials sector (+17.6%) was the second best performing S&P/TSX group, as gold prices rallied over US$944 an ounce during the quarter.
Health Care (-10.9%) and Consumer Discretionary (-10.7%) were the two worst performing sectors in the second quarter. The Health Care sector was dragged down by pharmaceutical and medical products stocks, while stocks associated with automobiles, apparel, and luxury goods negatively impacted the Consumer Discretionary sector.
Two of Canada's most prominent stocks faced volatility during the second quarter. BlackBerry maker Research in Motion Ltd. fell 16.5% in the last week of June, after issuing a second quarter profit outlook that fell short of most analysts' expectations. Communications giant BCE saw its stock decline on a report that its sale to a group of investors may not close until the end of the year because lenders are pushing to lower the price.
Despite concerns of slowing economic growth, the Bank of Canada (BoC) decided to hold its overnight lending rate unchanged at 3% on June 10th. Governor Mark Carney stated that fears of runaway inflation at a time of record oil prices have trumped the BoC's concerns about weak economic indicators. The DEX Universe Bond Index returned -0.7% in this environment.
US Market
Weak economic indicators, dismal corporate earnings, impact U.S. stocks
The U.S. stock market struggled in the second quarter as the Russell 3000 fell -2.8% and the S&P 500 declined -3.8%. For the first half of the year, the Russell 3000 was down -8.6%, while the S&P 500 dropped -9.5%.
One of the key drivers of the market declines has been the meltdown of the U.S. housing market, which has resulted in more than US$400-billion of write-downs at financial institutions globally. Other economic indicators remain pessimistic. June consumer confidence fell to its lowest level in 16 years as American buyers lost confidence amid falling property values, rising unemployment, and higher food and fuel costs.
U.S. stocks were also impacted by reports that broker Merrill Lynch slashed its earnings outlooks for regional banks in the United States by an average of 15% for 2008 and by an average of 17% for 2009. Many large regional banks in the U.S. may have to resort to further reserve-building measures and dividend reductions in order to offset mounting credit market losses.
U.S. stocks also headed sharply lower on June 26 after Goldman Sachs Group Inc., the world's largest securities firm, recommended investors sell Citigroup, the largest lender in the United States, and lowered its recommendation on U.S. brokerages.
Meanwhile, the U.S. Federal Reserve Board kept rates unchanged at 2% and said price pressures have increased. It is the first time since the credit crisis began that the Fed did not cut rates at a meeting. The central bank did reiterate that it would act as needed to promote economic expansion and stable prices.
World Markets
Overseas and Emerging Markets
Growing concern that escalating credit losses will hamper earnings also took a toll on foreign markets. The MSCI EAFE Index declined -3.0% in the second quarter, while the MSCI Emerging Markets Index fell -2.0%.
The Euro zone economy continues to slow, as higher food and energy costs, a drop in house prices, and higher credit costs have damped the confidence of European consumers, who have begun to rein in their spending. Throughout the second quarter, European retail sales declined by a record 2.9%; confidence among French businesses dropped to an all-time low; and June data showed industrial production in Germany unexpectedly fell.
In Japan, soaring oil and raw material costs caused profits among Japanese companies to fall 17.5%, the steepest decline in six years. Rising oil prices and the U.S. slowdown are making companies nervous about spending. Toyota Motor, for instance, plans to cut spending on plants and equipment, as falling U.S. sales, higher raw materials prices, and a strong yen erode earnings.
Stay invested and diversified
The market environment that investors experienced in the first half of 2008 further illustrates the advantages of staying invested in a balanced, properly diversified portfolio that can minimize risk.
What is also important is staying calm and staying invested. Risks such as economic downturns and credit uncertainty have historically had less of a negative impact on long-term investors than for those who panic and try to time the markets. A committed strategy that takes into account your time horizon, risk tolerance and financial needs may be your best investment option in the long-run.
This is a publication of Russell Investments Canada Limited. Nothing in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The contents in this publication are intended for general information purposes only and should not be acted upon without obtaining specific legal, tax, and investment advice from an investment professional concerning your own situation and any specific investment questions you may have.
The information, including any opinion, is based upon various sources we believe to be reliable but its accuracy cannot be guaranteed. It is for information only, is subject to change at any time, and does not constitute an offer or solicitation to buy or sell securities referred to.
Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use it may make or permit to be made of this information. Neither MSCI, any of its affiliates or any other person involved in or related to compiling, computing or creating the MSCI information (collectively, the "MSCI Parties") makes any express or implied warranties or representations with respect to such information or the results to be obtained by the use thereof, and the MSCI Parties hereby expressly disclaim all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential or any other damages (including, without limitation, lost profits) even if notified of, or if it might otherwise have anticipated, the possibility of such damages.
Date of First Use: 2008
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