Market focus-January 2016

Market focus-January 2016

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Frédérick Castonguay, CFA

Chief Investment Officer

Frederick.Castonguay@bluebridge.ca

Market focus-January 2016

What happened to the Santa Claus Rally  ?

I will first comment on the December outcome and then summarize the full year. Statistics show that the S&P 500 has historically gained, on average, approximately 2% during the year-end, also known as the Santa Claus rally. This phenomenon occurs from mid-December to early January and has been positive 80% of the time. However, the results this year were not as good. From December 15 to 31, the S&P500 return was flat, starting and ending at 2043. The first trading day of January was down by 2%!

The question is: why did this happen? There are a few reasons that could explain the different outcome this year. First, the Federal Reserve raised interest rates on December 16 which increased market volatility in the following days, a normal reaction after a rate hike. Raising rates confirmed that the US economy is in good shape, but it also put an end to the near-zero interest rate policy that had been in place since the financial crisis. Investors need to keep a close eye on higher borrowing costs and its impact on financial results.

Secondly, with generally poor equity returns this year and a lot of stocks losing value, increased tax loss selling had a greater than usual negative impact on the markets. Tax-loss selling generally occurs from mid-November to December 21. Adding this factor with Fed rate hike, it is not surprising to have experienced negative returns in December.

What was the story for 2015: the US dollar! Generally speaking, equities, bonds and hedge funds did not do much in US dollar terms. Materials and energy were hurt by both the strong US dollar and an oversupply of most commodities. Canada took it on the chin with its resource based economy.

Canadian and European investors might believe that they realized good positive returns this past year, except that, in order to have maintained 2014 wealth level, a Canadian investor’s portfolio would have had to generate a 16% return to counter the Canadian dollar weakness. As for a European investor, his portfolio would have had to generate a 10% return to compensate for the Euro’s loss to the US dollar.

This was the story for 2015. Hopefully 2016 will be different !