February 23rd, 2016

Interim Commentary: Positives


The purpose of this interim commentary is to communicate with our clients in regard to important recent developments in the markets, whether positive or negative, that we believe clients may be interested in hearing an explanation about. If you are not interested in receiving these communications, please let us know and we will take you off the mailing list. If we do not hear from you, we will continue to send along communications such as this when the situation warrants it.  



The year of 2016, thus far, has been categorized by relatively calm winter weather, which seems have transferred its stereotypically volatile behaviour into the capital markets. As we’ve mentioned in previous communications, most major stock markets have suffered their worst year-to-date performances in history.


Defensive sectors have outperformed as investors have flocked to favour predictable yields and cash flows as well as typical safe haven assets such as Precious Metals and US Treasury Bonds. As we’ve previously, this year-to-date outperformance of Precious Metals further illustrates our belief of using them as ‘portfolio insurance’.


However, over the past two weeks, there has been an apparent light at the end of the tunnel, as the S&P 500 and the TSX indices have rallied 4% and 5% off their bottoms, respectively. This has led many to ponder whether or not we are truly out of the woods, or whether the recent market strength is simply a temporary bounce. Typically, ‘contrarian’ data points tend to be inherently negative, however, with the amount of market bears at the moment, we thought that it would be useful to point to a number of points which would justify a return of equity market strength. See below for some of our major data points to consider:


  • With 4.9% unemployment in the U.S., the labour market is fairly ‘full’, a parlance meaning that most people who are seeking employment are able to find it. The unemployment rate for those with college degrees is only 2.5%. Much has been said about the relatively low participation rate, or percentage of citizens who consider themselves actively seeking employment, however, a large portion of the weakness in this statistic can be attributed to structural changes in the demographics of the U.S., such as the aging population and increased University enrollment figures.
  • Because of ‘full’ labour conditions’, worker wages are finally exhibiting upward pressure and rising, and real disposable income is up 3.5% in year-over-year terms.
  • Home values across America have risen, on average, 7.5% over the last year, adding a boost to the ‘wealth effect’ for the middle class.
  • The Consumer Price Index, which is typically used as a proxy for inflation, has been flat for most of the latest announcements; however, the consumer services portion of the most recently released data point was noted as being up 3%, representing a healthy increase in activity.
  • Despite possible additional interest rate hikes of marginal amounts, in a historical sense, interest rates remain at rock bottom levels, and consumers in the US have been able to meaningfully de-lever over the past few years. In addition, energy, heating and retail gas costs have been slashed at the consumer level. All of these forces continue to be positive for consumer spending habits and therefore the US economy, which is heavily reliant (70%) on consumer spending.


All of the best.







David A. MacNicol, 

B.Eng.Sci., CIM, FCSI


Portfolio Manager

MacNicol & Associates Asset Management Inc.

February 23rd, 2016