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Weekly Wrap-UpDecember 20-31, 1999 |
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Weekly Wrap-UpDecember 20-31, 1999 |
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The North American bond markets could not keep pace with the competition they received from equity markets into the end of the year. The Canadian and US bond markets underperformed significantly as an asset class this year, both down close to 13%. The FOMC meeting December, 21, saw rates in the US left unchanged, and the bias left at neutral. This did little to inspire bond investors who had pretty much packed up their portfolios for the year and gone home. The interest rate environment in North America will see interest rates in the US and Canada rise 50-75 basis points in the new year. There is little reason to be excited by government bonds in the near-term.
The Government of Canada long bond added 104 basis points to its yield over the year. At the outset of 1999, the Government of Canada 30 year long bond stood at 5.24%. At the close of business December 31, it yielded 6.28%. However, as compared to the US bond market, the Canadian market outperformed in local currency terms.
The US Treasury 30 year long bond finished 1999 yielding 6.48%, as compared with the 5.09% it yielded at the start of the year. The on-the-run long bond yield in the US rose 139 basis points over the course of the year. Given the continuing strength in the US economy, and the re-emergence of both Europe and Asia from their economic slumber, the Federal Reserve Board in the US will be in to raise interest rates further in the new year. Look for 50-75 basis points of tightening from the Fed in 2000.
The North American equity markets continued their upward momentum into the close of the year. The DJIA, S&P500 and Nasdaq all set record high closes to round out the year. The TSE faded slightly in the last few days of trading but still managed to recover from its early stagnation to post a 30% return on the year.
The performer of the year was the tech laden Nasdaq, which finished the year at a record high of 4069.31. Records fell at a rate of almost every fifth trading day on the Nasdaq, as it posted an annual return of 85.58%. This is the largest annual return posted by any exchange in North America, ever. The initial IPO mania of early 1999 lead to a more mature rally based on the those firms building the technology infrastructure. Some of these firms will survive and become the engines of economic development in the future, while the majority will fail leaving investors holding worthless share certificates. Beware of technology index funds going into the new year.
The TSE posted a 30% return on the year. This is primarily due to the large returns of a couple of the major component stocks of the index. Both BCE and Nortel Networks, which comprise over 19% of the index, drove the TSE to greater heights as the year progressed. Without these two juggernauts the rest of the exchange was up, on average, approximately 5%. All of the TSE's record high closes were posted in the last quarter, as it took the exchange that long to surpass it's previous record close of April, 1998.
The new year brings concern over interest rate increases and strong economic growth. As a result overweight equities, particularly those with solid cash flows in the cyclicals, and underweight the interest rate sensitive sectors. In the bond sector, overweight corporate bonds in order to take advantage of the strong economic growth, and underweight government bonds due to the increasing interest rate cycle we are now in.
Next week brings employment data in the US and Canada. Look for continuing signs of tight labour markets. This could mean lower bond and equity markets, as investors wait for the Fed to act. Good trading.
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