November was a good month for stock markets around the world, less so for bond markets.  But the currency or “investment” that did the best was bitcoin.

 

November 2017 Market Performance

All index returns are total return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

 

*Absolute change in yield, not the return from holding the security.

 

The S&P/TSX Composite was up +0.5% in November, and is up +7.8% so far in 2017.  In the US, the S&P500 hit several new record highs during the month and finished the month up +3.1%. European stocks were one of the few weak spots in global markets, and were down -1.9% in November, driven again by German stocks.  Emerging markets posted their first negative month of the year and were down -0.9% in local currency, but are still up +24.8% for the year.

The major bond indexes in Canada were positive for November. The broad index of Canadian bonds, FTSE TMX Universe Bond Index was up +0.8% and the FTSE TMX Short Term Bond Index was up +0.1%.  The Merrill Lynch US bond indexes were negative, except for the AAA index which was up +0.2%.  Emerging market bonds, when measured in Canadian dollars were flat for November.

Crude Oil was up for a third month in a row, this time up +5.6%.  Gold was slightly positive at +0.2%.   The broad Bloomberg Commodity Index was down -0.6% in November.

The strength in the Canadian dollar continued its slide, losing -1.0% against the US Dollar and a whopping -3.4% against the Euro.

 

Commentary

The investment news these days seems to be obsessed with Bitcoin.  Typically the investment press tends to be late to the party, a trend or idea in the finance world has to be very well established before the mainstream press picks it up.

What is Bitcoin?

Bitcoin was launched in January 2009, in the depths of the global financial crisis.  Unlike widely accepted currencies that are issued by the central bank of their country of origin, bitcoin isn’t issued by a central authority.  Bitcoins are created as the output of processing transactions and securing the network.  Unlike fiat currencies issued by central banks, there is a finite supply of bitcoins, which are created at a decreasing rate.

You can buy bitcoins by exchanging your Canadian Dollars at the prevailing exchange rate the same way you would with any other currency like US Dollars or Euros.  And just like with buying US Dollars or Euros, the exchange rate for bitcoins varies depending on where you buy them.

Typically wherever you are the merchants in that country will only accept the local currency in exchange for their goods or services.  You can’t use US Dollars or Euros at Hudson’s Bay, nor could you use Bitcoin.  Similarly, when shopping online, in the majority of cases you can only pay for the desired goods with a currency that the seller is willing to accept.  There are some businesses with major online presences that will accept bitcoin like Microsoft, Overstock, Expedia, Shopify, Intuit, and there are many smaller companies that will accept bitcoin as well.

The big risk for a business to accept bitcoin is that most of their expenses are paid for in another currency (like Canadian or US Dollars), which exposes them to exchange rate risk.  With the introduction of futures on bitcoin, businesses can more easily hedge their currency exposure when accepting bitcoin.  Given the extreme volatility of bitcoin, the introduction of futures may help the digital currency gain wider acceptance.

Are there any downsides of using bitcoin?

The major downside is that is not currently widely accepted and I have yet to see any reports of employees being paid in bitcoin, so you have to purchase the currency before you can use it.  There are transaction fees involved when buying and selling digital currencies and despite being online, buying and selling isn’t an immediate process.  And if you want to take the US Dollar cash out of your Coinbase account, for example, the transaction can take 3 days to complete.

While the internet has been very difficult for governments to regulate, a country could pass legislation banning its citizens from sending or receiving payments in bitcoin.  Actually enforcing that legislation would be another matter entirely.

Bitcoin has been very volatile, much more volatile than the most other currencies as well as other investments.  So if you’re buying bitcoin as a speculator, then be prepared for a wild ride!  Few investments move up or down 20% or more in a matter of hours.

Like any currency, bitcoin could become obsolete.  Given it is not widely accepted, this is likely bitcoin’s biggest risk.  A number of currencies have been replaced over the centuries.  As well, there are many other digital currencies such as etherium and litecoin that could supersede bitcoin in the future.

If I have Bitcoin, should I sell it?

If you bought bitcoin several years ago and kept it, you’re likely sitting on some very healthy gains.  Unless you are regularly transacting in bitcoin, given the hyperbolic rise in the last couple of months, it would be prudent to sell at least some of your bitcoin.  Anytime you’re sitting on investment gains that are in the hundreds of percent, it is wise to take profits.  Sure it could go up another 50%, but what if it drops 50%?

November Economic Indicator Recap

Below are the current readings on the major economic indicators: central bank interest rates, inflation, GDP and unemployment.

Below are the current readings on a few other often followed economic indicators: retail sales and housing market metrics.

A Closer Look at the Canadian Economy

 

Canada’s unemployment rate rose 0.1% to 6.3% in October, despite 35,300 net new jobs being added.  88,700 full time jobs were added, while 53,400 part time jobs were lost.

Housing prices across Canada declined -1.0% in October, the largest monthly decline since September 2010.  The decline was attributed to another decline greater than -2% in Toronto, this time -2.8%.  Hamilton was the other major decliner at -1.8%.  In a rare occurrence, Halifax was the top gainer at +1.3%.

The level of new housing starts rose +1.6% in October, while the value of building permits issued in September rose +3.8%.

The primary inflation rate was up +0.1% in October, or +1.4% on an annual basis.  Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest was+0.9%.  With inflation rates so low, there is little pressure on the Bank of Canada to raise interest rates in the near term.

Retail sales were up +0.1% in September, or +0.3% excluding auto sales, well below expectations of +0.9%.  Sales declined -2.8% at clothing stores and -0.5% at car dealers.  Compared to a year ago, retail sales were up a healthy +6.2%.

Canada’s GDP rose +0.2% in September, bringing the GDP growth for the 3^rd quarter of 2017 to +1.7% annualized.  For September oil & gas production was up +1.0%, while manufacturing was flat.

The Bank of Canada met on December 6, and as expected left the benchmark interest rate unchanged at +1.0%.

*Sources: MSCI, FTSE, Morningstar Direct, Trading Economics