Cautiously Optimistic, Despite Market Uncertainty
Equity markets treaded water on both sides of the border in the first quarter of 2015. The S&P/TSX Composite Total Return Index was up 2.6% during the quarter while the S&P 500 Total Return Index was up 1.0% in local currency. The US benchmark was up 10.1% in Canadian dollars, however, as the Canadian dollar weakened 9.2% against the US dollar following the Bank of Canada’s somewhat surprising interest rate cut in February amid fears of weakening economic conditions.
US DOLLAR STRENGTH REMAINS KEY GLOBAL THEME
US dollar strength was a key theme globally as well. The trade-weighted US Dollar Index (DXY) rose 9% during the quarter and is up a staggering 23% year-over-year. Quantitative easing in Europe, surprise interest rate cuts in Canada and Australia and continued easing in Japan have all contributed to US dollar strength, and come at a time where the US Federal Reserve is considering the notion of raising interest rates for the first time since 2007. Headline commodity prices, which are priced in US dollars, have been hit hard, however, the impact is muted for both producers and consumers depending on the translation back to their local currency. As you can see in the chart below, the US Dollar Index seems to have peaked in late March. Obviously much of the strength in the US dollar of late has been in anticipation of the Federal Reserve raising interest rates, and we wonder if the actual event will live up to the hype. Most market participants have pushed the timetable for a rate increase out to September, despite the economy nearing full employment. Additionally, the US Federal Reserve has only increased interest rates once when inflation has been below the 2% level, in 1987. We would express caution on US equities at current valuations due to potential interest rate increases, which can be negative for equity values. S&P 500 earnings growth will continue to be challenged by the strong US dollar, especially given weakening exports and the significant amount of earnings abroad that must be translated back to the home currency. The past few years have been characterized by a rising US dollar and rising US equity markets. We will be watching closely to see if the reaction to the actual Federal Reserve interest rate increases (if any) lives up to the speculation.
Read full Q1-2015 Quarterly Review