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WINTER 2006 |
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F
I N A N C I A L
Market
commentary: What has happened in the markets to date
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Stock Photo |
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The strong performance of
the global equity markets continued through the first half of Q2. Solid
global economic growth, strengthening commodity prices, and good
corporate earnings results largely drove this performance.
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By Brian J. Cook |
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The strong performance of the global
equity markets continued through the first half of Q2. Solid global
economic growth, strengthening commodity prices, and good corporate
earnings results largely drove this performance. At the end of Q2,
market volatility returned, as global equity markets entered into a
pronounced correction. Uncertainty reigned due to indications of a
slow down in the growth rate of the U.S. economy, threats of rising
inflation, and the impact of ongoing monetary tightening from
Central Banks.
While the markets staged a modest
recovery, the Canadian equity market was down 4% in Q2, led by a retreat
in the energy and financial sectors. A similar pattern was seen in the
U.S. and international markets, with the S&P500 and the MSCI EAFE indexes
declining 6% and 3.8% respectively. The declines were broad-based, with
most sectors experiencing significant declines.
In July, there were several indications
that a wall of worry existed in the markets. Central banks were increasing
interest rates; concerns in the U.S. abounded with the decline in the U.S.
housing market and whether the U.S. consumer would keep spending; and, oil
prices continued their upward spiral.
It is tough to call the markets, as Q3
produced remarkably strong results. The S&P500 rallied strongly, up
5.7%, well ahead of the S&P/TSX composite. The price of oil dropped
sharply to $62.90 U.S. per barrel at quarter end. For a summary of major
index returns by quarter, see the chart below.
Outlook for Canada
We believe that the outlook for Canada is generally strong, as the
fundamentals are solid. Core inflation remains at 2%, the unemployment
rate fell to 6.1% in Q2, the lowest level in 30 years, and the 2006 GDP
growth for this year is forecasted by the OECD to be 3.1%. In addition,
the Bank of Canada has indicated that it will likely hold on further
interest rate increases for the time being. One risk factor is the
extent of the slow down in the U.S. economy and what the impact will be on
Canada and in particular central Canada.
Brian J. Cook, CA, CFA is Assistant
Vice-President, Investment Management, with MD Financial.
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