2014 End of year summary

The “Great Rotation” – the great stampede to stocks finally started (some 5 years after the stock market lows of March 2009). Most of the hot money is going into index products. Is this a contrarian sign?

U.S. interest rates both surprised confounded most everyone by declining throughout the year. In the U.S., the benchmark index I use to track U.S. interest rates is the 10 year Treasury Bond. Despite all kinds of predictions of higher U.S. interest rates and “fed policy”, rates started the year at around 3% and will likely end the year in the low 2% range. Declining interest rates are good news for bond holders, as bond prices generally increase in value when interest rates decline.

Canadian interest rates seemed to move in opposite directions – mortgage rates moved lower but deposit rates (GICs) went higher. Longer term GICs are back in the high 2% range and is approaching the 3% range. A 5-year mortgage can be had for less than 3% even as Canada’s housing boom continues unabated.[1]

The GIC spread over two of Canada’s largest banks moved to historically high levels. Their 1 year GIC rate interest rate offering was a meagre 0.9% while deposit brokers could offer 2.36% credit union guaranteed investment certificates for the same term, some 2.5 times higher!!

One of the bigger investment stories in Canada was about our plummeting currency. Canada’s dollar decline accelerated in the summer of 2014 and is hovering around the $0.87 level. Canada’s currency as recently as 2012 was at or over par with the U.S. dollar. CIBC’s chief economist, Benjamin Tal believes the Bank of Canada has an unofficial “low dollar” policy in place in order to help drive growth in the economy. The Bank of Canada may get their wish with the strong tailwind of plummeting oil prices. Canada’s currency has an international reputation as being a “petro-currency”. Where oil goes – so goes our dollar.

It is not only the Canadian dollar that has taken it on the nose. Bloodied somewhat is Canada’s stock market that was doing really well until about early September. Energy is a major component in Canada’s market and the decline in energy stocks has caused a significant stock market correction. The stock market is still in positive territory for the year but not by much.

The Cold War is back! The tit for tat economic battles over the Ukraine has isolated Russia from the West once again. Russia’s economic isolation is putting the ruble under significant downward pressure.

Emerging markets are being hurt by the soaring U.S. dollar and at time of writing, was trading in negative territory from a year ago.

Europe is slightly better but barring any surprises over the next couple of weeks, may eek out a low single digit gain for the year.

From an advisor viewpoint, 2014 is a watershed year in our industry as many new regulations came into effect. New fund disclosure documents called “Fund Facts” made their debut. If you purchased a new mutual fund or added to an existing one, you have received the new Fund Facts disclosure document for the mutual fund you will be buying. Regulators are still mulling over the idea of eliminating commissions in the mutual fund industry and going to a fee-based system. I have written extensively about this topic for some time on www.wealthadviser.ca. I wanted to let everyone know in advance what these changes will be and how the changes will significantly change the way we buy mutual funds in Canada. These changes are important. Please see my blog at wealthadviser.ca for more details.

2014 was certainly not a dull year as stock markets had a very strong year initially –setting many all-time record highs – especially the U.S. stock market. Whether we have a weak finish or not depends on the month of December. The year 2014 could be very much like 2011 – a flat year.

Although the stock markets may take away some of our ebullient gains, on a positive note, the U.S. economy appears to be strongly recovering. This bodes well for their most important trading partner – Canada. With our cheaper dollar and much cheaper energy costs, our manufacturing heartland may spring back to life once again.

Stock markets have been on a roll for many years now and we should not be sitting on our laurels. It is possible you may have too much stock exposure. My greatest challenge is getting clients to review their accounts during today’s good times. It is very easy to become complacent in these types of markets.

Please call me to set up a portfolio review in order to see if you have had any material changes in your life, changes in your financial objectives, risk tolerance etc. Some important changes to your portfolio may be required.

Merry Christmas and a Happy New Year!

[1]at time of writing, Home Trust was offering a 2.95% 5 year mortgage.