Investment Performance: Selected Rates of Return

• Equity Index Returns
• Bond Index Returns

Investment Performance: Equity Data

• S&P/TSX Composite Index
• S&P 500 Index

Investment Performance: Fixed-Income Data

• Bank of Canada (BoC) Target Rate
• Bank of Canada Bond Yield Curve
• DEX Universe Bond Index

Other Quarterly Highlights: Noteworthy Developments in the U.S. Economy

• Correlation of S&P 500 Index Constituents
• Government Transfers as a Percent of Disposable Income
• Rise In Commodity Prices
• Small Business Optimism

To discuss any of the content in this Synopsis, contact your Segal Advisors investment consultant or the nearest office. Alternatively, send an e-mail message to info@sibson.ca

The Economy: Key Indicators

This section focuses on on Segal Advisors’ commentary on select economic indicators for the fourth quarter (Q4) of 2010.

Canada versus U.S. Employment Levels

The two charts below highlight the difference between employment recovery in Canada and the U.S.

Chart 1A shows how the employment levels have reacted to the recession. After a sudden drop in late 2008, the Canadian employment levels began to slowly rebound in 2009 and increase drastically in 2010. In the U.S., the recession caused a greater drop in employment levels, falling from a peak of 100 to a low of 94 at the end of 2010. The Canadian employment graph is a U-shape recovery, whereas, the U.S. graph is a half V-shape recovery.

Chart 1B further reflects how the Canadian employment has been more resilient than in the U.S. where long-term unemployment has risen significantly and remained high even after the U.S. announced an end to the recession. The U.S. is witnessing a non-employment recovery as industries, such as the automotive, finance and construction industries, have seen recent restructuring.

CHART 1-A: Canadian and U.S. employment levels	CHART 1-B: Long-term unemployment as percent of total unemployment

   
                                                                                                            * The data series for Canada is not seasonally adjusted.

Last observation for both charts: September 2010                  

Source Chart 1-A: Statistics Canada, U.S. Bureau of Labor Statistics, NBER (dating of U.S. cycles) and Bank of Canada

Source Chart 1-B: Statistics Canada, and U.S. Bureau of Labor Statistics                                                                      

Source of both charts: Bank of Canada’s Monetary Policy Report, October 2010: http://www.bankofcanada.ca/en/mpr/pdf/2010/mproct10.pdf

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CPI: Percentage Change Year over Year

The Consumer Price Index (CPI) rose 2.4 percent in the 12 months to December 2010, following a 2.0 percent increase in November. The 0.4 percentage-point gain was mainly a result of higher gasoline prices. Between December 2009 and December 2010, gasoline prices increased 13.0 percent, after advancing 7.2 percent in the 12 months to November. Excluding gasoline, the CPI was up 1.8 percent in December. Overall, energy prices rose 10.5 percent during the 12 months to December.

Prices increased in seven of the eight major components of the CPI in the 12 months to December; the only exception was clothing and footwear.

Consumer prices increased in every province between December 2009 and December 2010. Moreover, in all provinces except Saskatchewan, prices rose at a faster rate on a year-over-year basis in December 2010 than they did in November 2010.

Source: Statistics Canada

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Canadian vs. U.S. Dollar Exchange Rate

The Canadian dollar rose 3.2 percent against its U.S. counterpart, ending Q4 2010 above parity at 100.54 cents U.S. compared to 97.11 cents at the beginning of the quarter. Over the year, the value of the Canadian dollar grew by 5.5 percent compared to the U.S. dollar.

The Canadian dollar continues its positive trend compared to the U.S. greenback due to strong commodity prices, Canada’s relative fiscal strength compared to other governments, and the unexpected growth in the Canadian economy.

Source: Bank of Canada

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Percentage Change in GDP

Expressed at an annualized rate,* real gross domestic product (GDP) grew 1.0 percent in the third quarter of 2010 (the most recent available data), after expanding by 2.3 percent in the second quarter.

In Q3, business investment in plants and equipment recorded its strongest quarterly increase for the year, as investment in machinery and equipment expanded 6.5 percent over the quarter. An increase in consumer spending also contributed to the growth in final domestic demand.

The increase in manufacturing was concentrated in the production of durable goods, while the strength in mining was attributable largely to higher activity at copper, nickel, lead and zinc mines.

Consumer spending on goods and services advanced 0.9 percent in the Q3, similar to the average growth of the previous five quarters.

Exports of goods and services declined 1.3 percent after four consecutive quarters of growth, whereas, imports of goods and services were up 1.6 percent, the fifth consecutive quarterly increase.

In October, real GDP increased 0.2 percent.

* The annualized change is the growth rate compounded annually. The change is the growth rate from one period to the next.

Source: Bank of Canada Financial Statistics

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Investment Performance: Selected Rates of Return

This section presents rates of return for selected equity, fixed-income and other indices. The graphs illustrate returns for Q4 2010. The tables of data show returns for the latest quarter and one-, three-, five- and 10-year annualized time frames. All data in the tables are percentages.

Equity Index Returns

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Bond Index Returns

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Investment Performance: Equity Data

The tables of data in this section present equity data broken down by the Global Industry Classification Standard (GICS) for selected indices. The GICS is a classification system developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s consisting of 10 sectors, 24 industry groups, 68 industries and 154 sub-industries. The tables show returns by sector for both Q4 2010 and one-year periods. Each sector’s weight in the overall index return as of December 31, 2010 is also noted.

S&P/TSX Composite Index

The S&P/TSX continued its quarterly growth with a return of 9.4 percent over Q4 2010. All sectors provided positive returns for the quarter. Overall, 2010 was a positive year for the S&P/TSX, as the index returned a healthy 17.6 percent over the year. The best GICS sector over the year was health care with a 57 percent return. It should be noted that although health care had a spectacular return over the quarter, the segment only accounts for 0.8 percent of the overall index and is dominated by a few names.

The positive return of the S&P/TSX is attributed to the three main sectors that drive the S&P/TSX, the Financial, Energy and Materials sector. The Materials sector returned 36.5 percent over the year as materials and commodities continued to surge forward on the global market. The other two sectors, Energy and Financials, also had low double-digit returns over the year.

Source: Mellon Analytical Solutions, LLC

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S&P 500 Index

The S&P 500 (in $CAD) had more muted returns than the S&P/TSX over both Q4 2010 and the year, yet still provided positive returns for investors. The Energy and Materials sector also led the way over the quarter for the S&P 500. Unlike the S&P/TSX, the S&P 500 did have one sector that had negative returns over the quarter. The Utilities sector has struggled over the year with a zero return, which was brought down over the quarter, as the sector declined 2.1 percent.

The diversity of the S&P 500 is evident in the one-year numbers. Consumer Discretionary had the largest return over this period at 21.0 percent. This return reflects the continuing strength of the U.S. consumer, but also reflects the global awareness of Consumer Discretionary firms in the U.S. and their presence abroad.

Source: Standard & Poor’s

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Investment Performance: Fixed-Income Data

This section focuses on selected fixed-income data.

Bank of Canada (BoC) Target Rate

The Bank of Canada (BoC) left rates at 1.0 percent during Q4 2010. Over the entire year, the BoC increased the rate from 0.25 basis points* to 1.0 percent.

At the last meeting for 2010, which was held in October, the BoC decided to keep rates at 1.0 percent given the still-weak U.S. outlook and domestic considerations that are expected to slow consumption and housing activity in Canada.

* As a reminder, 10 bps equals 0.1 percent.

Interest Rates: Central Bank – Overnight Target Rate, Canada

Source: Statistics Canada

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Bank of Canada Bond Yield Curve

During Q4 2010, the yield curve shifted upwards, using the long-term yield as an axis. Short-term yields rose modestly from 1.4 percent to 1.7 percent. The long-term part of the yield curve remained in the 3.5 percent area.

The biggest jump in the yield curve was at the seven-year mark, where the curve went from just over 2.0 percent in September to just below 3.0 percent in December.

Treasury Yield Curve

Source: Statistics Canada

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DEX Universe Bond Index

Over Q4 2010, the DEX Universe Bond Index underperformed in all sectors. The underperformance can be directly linked to the upwards shift of yields over the course of the quarter. Returns in the Canadian fixed-income market were very similar, with the worst-performing sector underperforming the best-performing sector by only 0.4 percent.

DEX Universe Bond Index: Breakdown by Corporate, Municipal, Provincial and Federal Sectors

*Note: Modified Duration in parenthesis. "Modified Duration" is a formula that expresses the measurable change in the value of a security in response to a change in interest rates.

Source: PC-Bond

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Other Quarterly Highlights: Noteworthy Developments in the U.S. Economy

Because institutional investors in Canada keep a close eye on the U.S. economy as a driver of global growth, this section discusses noteworthy Q4 2010 developments.

Correlation of S&P 500 Index Constituents

Over the past 15 years, there have been short time periods in which the stock price movements of the majority of U.S. companies (“constituents”) in Standard & Poor’s 500 Index (S&P 500) have behaved in a similar fashion. The phenomenon of high correlation was previously associated with market crashes, as in 1987, when the S&P 500 Index constituents reached a correlation of 83 percent. More recently, the S&P 500 Index constituents have maintained a correlation that exceeds the 15-year average of 31 percent. This is illustrated in the graph below.

S&P 500 Index Constituents 30-Day Realized Correlation

Source: Grosvenor Capital Management, L.P.

The higher-than-average correlation can be partially explained by market volatility throughout the year, as well as investors focusing on macroeconomic themes, as opposed to corporate fundamentals, such as return on assets and cash flow. This has resulted in a difficult stock-picking environment for many bottom-up fundamental investment managers (i.e., managers that focus on the fundamentals of specific companies, in contrast to top-down managers that first look at macroeconomic factors and industry data).

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Government Transfers as a Percent of Disposable Income

Government Transfer Payments* is a component of personal income in the U.S., which involves payments for which no current services are performed. This consists of payments to individuals and nonprofit institutions by federal, state and local governments and businesses. Disposable income is total personal income minus personal current taxes. As the chart below shows, the government currently accounts for a record high of over 20 percent of personal disposable income.

Government Transfers as a Percent of Disposable Income

This data suggests that while personal disposable income and consumer spending have been on the rise, there has been minimal growth attributable to individuals. Approximately one-half of the rebound in GDP from the 2009 lows can be traced to the amount of consumer spending related to government payments.

* The term “Government Transfer Payments” includes Social Security, Medicare and unemployment insurance.

Source: Bureau of Economic Analysis

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Rise In Commodity Prices

The graph below charts the U.S. Food Price Index, Agricultural Raw Materials Index and Metals Price Index over the five-year period that began in December 2005 and ended in December 2010.

Commodity Price Index Comparison

Source: International Monetary Fund’s Primary Commodity Prices: http://www.imf.org/external/np/res/commod/index.asp

2010 was a year of strength for commodities. Some commodity prices more than doubled over the year. As Europe, Japan and the U.S. pursued loose monetary policy, commodity prices continued their upswing. Although rising commodity prices can primarily be attributed to demand from emerging economies, speculation may be playing a role in rising prices.

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Small Business Optimism

In December 2010, the U.S. National Federation of Independent Business (NFIB) Small Business Optimism Index fell by .06 to 92.6, following a steady increase since May 2010. This marked the 36th consecutive month of recessionary levels. Despite the slight decrease, the index remains at one of the highest levels since the start of the recession in December 2007.

As reported by the U.S. Small Business Administration (SBA), small businesses, which are defined by the government as those with fewer than 500 employees, represent 99.7 percent of all employers and generated 65 percent of the 15 million net new jobs created between 1993 and 2009.

According to the NFIB’s Small Business Economic Trends Survey, given to its members on a quarterly and monthly basis, many businesses are not planning to hire until sales increase. Overall, credit needs have not been met, capital-spending remains at historic lows, and sales remain weak. Continued weak sales and government regulations were cited as two of the most important problems viewed by small business owners.

NFIB Small Business Optimism Index

Sources: NFIB Small Business Economic Trends, January 2011. © NFIB Research Foundation. ISBS #0940791-24-2

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Helpful Online Resources

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