moneyLooking at the State of investment markets, over the past two months they have shown the following performance characteristics:

  • European equity markets have rebounded sharply in local currency terms as the positive effects of the European Central Bank’s Quantitative Easing (QE, i.e. easy-money policy) filters through to the real economy;
  • The U.S. economy has remained one of the best performing growth markets;
  • The U.S. Federal Reserve is sticking to its policy of threatening interest rate hikes in the near future, regardless of the absence of inflation;
  • Thus, the U.S. dollar has remained very strong against most major currencies;
  • Resource prices, and in particular the price of oil, has stabilized at sharply lower price levels from a year ago;
  • Thus, the Canadian dollar remains depressed but has bottomed out;
  • China’s economy is showing signs of weakness;
  • Emerging markets (eg. Russia, Brazil, et al.) are moribund;
  • Bond yields around the world remain extremely low and bond investors are a depressed lot.

Are there any signs that these characteristics will change in the next few months (in the absence of any unforeseen global crisis)?

  • There is a good probability for a rebound, real though modest, in energy prices as the U.S economy remains strong and Europe steadily picks up. Supply will limit the rebound;
  • This will help the Canadian dollar, though again to a modest degree;
  • The stubbornness of U.S. monetary authorities on interest rate hikes will continue and probably happen to a modest degree;
  • Europe will continue to recover from its economic malaise.

For Canadian investors, this translates into the following for the next few months:

  • Optimism for Canadian equity prices;
  • Optimism for U.S. equity prices, with gains tempered by a stronger Canadian dollar
  • Little reason to own bonds for income – continue with good paying dividend stocks and REITS, with plenty of quality common equities yielding 4-5% still available in the market.