Bil Ioannidis Financial Insights Weekly - Business &Amp; Personal

A year in the markets: A retrospective

On March 9 marks the one year anniversary of the market bottom. Last year at this time, following a lengthy and precipitous decline, stock markets around the world established lows. Looking back, few realized how poised we were for the springboard of recovery that resulted from massive and coordinated global policies aimed at stabilizing economies and restoring confidence.

In 2008, the TSX saw declines in the order of 30%, and continued this descent in the early part of 2009 up to March 9. By the time 2009 was complete, however, the S&P/TSX was up 35% for the calendar year—the best one-year calendar return in over three decades.

In the past 12 months, the TSX gained more than 58%, a level of annual return only experienced during three separate periods in the history of the benchmark index.

As the following table shows, global markets have also gained significant ground in the past year:

What went well?

• Economic activity has improved. Gross Domestic Product or GDP, a measurement of a country’s output of all goods and services, showed improving momentum during the third and fourth quarters of 2009. In Canada and the U.S., the economy grew at 5.0%  and 5.9% respectively during the fourth quarter on a seasonally-adjusted basis. Fourth quarter growth was 6.8% in China, and 0.3% in the U.K.
• Corporate earnings began to exceed expectations in the fourth quarter. Consumer spending and sentiment improved, and investment in new housing posted its first quarterly gain since 2007.
• Commodity prices regained lost ground. For example, one year ago, oil was sitting at just under $33 a barrel and has subsequently climbed back up to $80 a barrel. Basic materials have increased in price, reflecting increased demand from accelerating economic activity.

Outlook remains constructive

As in any economic cycle, headwinds exist, but the outlook continues to be constructive.

As forward-looking mechanisms, markets focus on identifying potential risks; in this case, high unemployment, cautious and deleveraging consumers, inflation, potential interest rate increases, and the possibility of growing sovereign debt issues, similar to those being experienced in Greece. These risks, to date, have been identified and factored into current market prices.

Global growth is expected to gather steam in 2010 based on inventory restocking and the full impact of monetary policy measures including low interest rates. The full extent of stimulus spending has not yet reached capacity in the economy. Typically, this kind of spending does take at least 12 months to take hold, so the benefits are only now beginning to ripple through the economic system. Additional stimulus funding commitments in the recent budget are likely to further bolster the economy.

Although recoveries do not occur in a straight line or without stops or pauses, history has shown once a recovery takes hold, it tends to be both strong and durable. In fact, periods of expansion following downturns are on average about five years.

Valuations today remain reasonable. For a number of measures, including price-to-earnings multiples, earnings growth and return on equity, markets reflect fair value and opportunity for growth. Most notable is the unprecedented strong financial positions of corporations that continue to exercise prudence with strong balance sheets and very low debt levels.