by Gordon Pape
After all the turmoil, a little stability is welcome.
The first quarter is now in the history books and on balance it was rather unimpressive. We had some big market swings both up and down and some pretty good earnings reports but at the end of the day the S&P/TSX Composite Index was able to produce only a 2.5 per cent gain for the three months to March 31.
For the first time in several years, we're trailing the major U.S. indexes by a considerable margin. The S&P 500 was ahead 4.9 per cent in the quarter, the Dow Jones Industrials Average was up 4.1 per cent, and the Nasdaq Composite gained 5.7 per cent. Had it not been for the continued rise in the value of the loonie, which is up 3.9 per cent since Jan. 1, New York would have been the better place for Canadian investors to put money.
The TSX was actually one of the worst performers in the world in the first quarter. Despite worries about the financial condition of Greece, Spain, Portugal and other euro zone countries, several major European markets outperformed us. The U.K. Dow was ahead 5.2 per cent and the German Dow gained 3.3 per cent.
In Asia, the best performer was the downtrodden Nikkei 225 which advanced an impressive 5.2 per cent in the quarter despite Toyota's woes. But Hong Kong is down 2.9 per cent year to date and the Shanghai Composite is off 5.1 per cent.
If you want to know what's been holding back the TSX, take a look at the sub-indexes. One of the index's two major pillars, financials, is still holding up with a first-quarter gain of 7.1 per cent. But the other pillar, natural resources, is showing signs of weakness. The S&P/TSX Capped Energy Index was off 2.8 per cent in the quarter while the Materials Index gained a meagre 0.2 per cent. Among the resource stocks, only mining companies are pulling their weight with a first quarter gain of 10.5 per cent.
Back in January I predicted that stock market momentum would slow after the strong surge we saw over the last nine months of 2009. I said the early part of the year would be relatively flat, which turned out to be the case. I also predicted a lift in the second quarter as first-quarter earnings come out and I'm sticking to that although I do not expect anything dramatic. My year-end TSX target of 12,900 to 13,500 still stands but I expect most of the gains will come in the fall.
I also said at that time that bonds would underperform this year in anticipation of an increase in interest rates. On the whole, bonds are not doing as well as they were a year ago with the DEX Universe Bond Index showing a year-to-date gain of only 1.37 per cent. But the weakness is in government issues. Corporate bonds continue to generate good returns. The DEX Universe All Corporate Bond Index is up 2.29 per cent year-to-date. What's especially interesting is that when you dig into the numbers, it turns out that the lower-rated issues are the best performers. The Corporate BBB Bond Index is up 3.49 per cent for 2010 compared to a gain of only 1.14 per cent for the Corporate Bond AA Index.
The really big money this year is being made in Maple Bonds. These are bonds issued in Canadian dollars by U.S. companies such as JP Morgan Chase and Banc America. In an interview for the February issue of my Mutual Funds/ETFs Update newsletter, Scott Lamont, head of the fixed-income team at Phillips, Hager & North, said these bonds represent one of the few "pockets of value" still available in the fixed income market. Investors have been waking up to that fact; the DEX Maple Bond Index is up an impressive 9.63 per cent year-to-date. But the easy money may have been made; a graph of the index suggests that prices are levelling off.
In summary, not much changed in the first quarter. Events unfolded pretty much as expected and markets followed suit. Some people might even describe it as dull but compared to what we've lived through for the past couple of years, a little dullness is welcome right now.
Gordon Pape's latest book is The Ultimate TFSA Guide: Strategies for Building a Tax-Free Fortune, published by Penguin Group Canada. It can be ordered at 28 per cent off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20