MD Financial Management: Chief Investment Officer Message—Markets Rally In Wake Of Deferred Debt Ceiling Decision

November 6, 2013

MD’S MARKET UPDATE: Big Month For Stocks As Market Rally Continues

Through October, all major indices rose dramatically in a very bullish month, with one-month returns paralleling many of our longer-run annual return expectations.

Emerging markets were the best-performing asset class, continuing their recent recovery after faltering earlier in the year. The TSX lagged its international peers slightly, mostly due to a weakening Canadian dollar. Bonds delivered positive returns as yields drifted downwards, and commodities softened slightly, led by lower energy prices.

RESULTS ACROSS GLOBAL ECONOMIES: Emerging Markets Lead, Continuing Recent Recovery

In mid-October, the U.S. again avoided default by deferring a decision on the debt ceiling to early 2014. At the end of October, the U.S. Federal Reserve reaffirmed the fiscal policy stance supporting its asset purchase program; citing low employment, tame inflation and ongoing fiscal retrenchment to support holding steady the pace and volume of purchases. The announcement of Janet Yellen’s nomination to replace Federal Reserve Chairman Ben Bernanke in January 2014 calmed anxious financial markets as Dr. Yellen is seen as likely to continue the monetary stimulus policies of Chairman Bernanke. President Obama called this nomination one of his “most important economic decisions.”

In Europe, economic recovery continued, with economic sentiment reaching highs last seen in 2011, and financial indicators suggesting little stress in the overall financial system.

In Japan, “Abenomics”—the economic policies advocated by Shinzō Abe, the current Prime Minister of Japan—continue to boost economic prospects, with the Purchasing Managers Index (an indicator of the economic health of the manufacturing sector) also pointing to robust growth, and the Bank of Japan maintaining the rapid pace of Quantitative Easing domestically.

China also saw strong third quarter results, expanding 7.8% year over year.

Meanwhile, in Canada, the Bank of Canada turned dovish (moved towards monetary policies that involve the maintenance of low interest rates), noting excess capacity in the Canadian economy, coupled with very low levels of inflation and business investment and exports that are underperforming the Bank’s expectations.

CAPITAL MARKET INDICATORS AT END OCTOBER 2013
(in Canadian dollar terms, unless otherwise indicated)

Market Indicator 1-Month Return (%) 1-Year Return (%)
Canada (S&P TSX Composite Index) +4.72 +11.0
U.S. (S&P 500 Index) +6.12 +32.69
Europe, Australasia and Far East (MSCI EAFE Index) +4.87 +32.93
Emerging Markets (MSCI EM Index) +6.4 +11.54
Canadian Bonds (DEX Universe Bond Index) +1.05 -0.05
Exchange Rate: Canadian Dollar to U.S. Dollar -1.3 -4.3
Gold Price (USD/oz.) -0.3 -23.0
Oil Price (WTI, crude oil, USD per barrel) -5.4 +12.2

Sources: StateStreet via StyleADVISOR, PC Bond Analytics, and Bloomberg.

WHAT THIS MEANS FOR YOU

MD maintains a careful watch on global economic trends, combining expert views from selected managers worldwide for the benefit of our investors. Your MD Advisor is available to help you understand MD’s investment methodology and the impacts of global economic trends on your investment portfolio, and I encourage you to reach out directly to your advisor if you would like to learn more.

William R. Horton, Jr., CFA
Chief Investment Officer
MD Financial Management Inc.

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