2016 was a year like a good suspense film, full of plot twists, unexpected events, with alternating emotions of joy and anguish. While the broad stock market indexes in North America as measured by the S&P500 for the United States and the S&P/TSX Composite for Canada, provided positive and attractive returns, the path to those results was very uneven to say the least. Some of the Counsel strategic portfolios did not fully participate in these results, but with very good reason. To gain a better understanding of what happened in 2016, investors must take a broader perspective by looking back over the last two full years, and not view 2016 in isolation.
Coming into this period, there were major concerns for investors. Tops on their list was declining corporate profits, the ultimate driver of stock prices. Corporate earnings had been weakening for most of 2015 and most of 2016. Commodity prices led by weakening oil prices, had also been reflecting disinflationary global economic conditions. Economies of the developed nations of Europe and Asia have been mired in economic stagnation over the last few years with rising unemployment and over-indebted government finances. Here in North America, the economic recovery has been anaemic but stronger than most of the world. In addition, the technical condition of the global stock markets had been deteriorating beneath the surface, while the stock indexes experienced alternating bouts of strength then weakness.
Collectively, these conditions warranted a more defensive posture in our portfolio allocation strategies.
As demonstrated in the charts below, from the beginning of 2015 until the end of 2016, North American stock markets were essentially unchanged in value, with the exception of the last 2 months of 2016 in the United States. While the modest returns of the Canadian market accrued in the first few months of 2015, before a dramatic decline, followed by a dramatic recovery, brought levels back to where they were in early May, 2015.
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