Stock markets had an uncharacteristically bad December. The US Federal Reserve finally raised interest rates, while the Bank of Canada left interest rates alone.

 

December 2015 Market Performance

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

 

Other Market Data	Month-end Value	Return for December	Return for 2015
Oil Price (USD)	$38.10	-8.52%	-28.48%
Gold Price (USD)	$1,060.20	-5.25%	-10.46%
US 3 month T-bill	+0.16%	-0.06%*	+0.12%*
US 10 year Bond	+2.27%	+0.06%*	+0.10%*
USD/CAD FX rate	1.3840	+3.65%	+19.30%
EUR/CAD FX rate	1.5029	+6.54%	+7.06%
CBOE Volatility Index (VIX)	18.21	+12.90%	-5.16%

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

Stock markets had an uncharacteristically poor month in December. When measured in their home currency, none of the major stock market indexes we track were positive.  Of course, with the continued slide in the Canadian Dollar, these indexes were positive when measured in Canadian Dollars, as you can see in the chart above.  The worst performing index was for German stocks which were down -5.6% for the month.  Despite that drop, German stocks were one of the top performers in 2015, along with Japanese stocks.  Volatility in Canada and the US rose as the stock markets declined.

Canadian corporate bonds performed well, up +0.1% to +1.9% depending on the sector. The broad FTSE/TMX Universe Bond Index was up +1.1% for the month and +3.5% for the year.  Investment grade bonds in the US did not perform as well and were only up +0.2% in December and +0.6% for 2015.  The further down the credit ratings ladder you went in December, the worst performance became.  The most speculative grade bonds as measured by the Merrill Lynch US High Yield CCC and Lower index was down -5% in December and -15% for 2015.  Canadian high yield was also negative for the month and 2015, but much less so.

Commodities continued to fare poorly.  Oil continued to slide and was down -8.5% in December and was down -28.5% for 2015. Gold was down -0.5% for the month and -10.5% for the year. The worst performing metals futures in November, platinum and palladium, recovered somewhat in December but still finished the year down around -30%. Unsurprisingly, with the unseasonably warm fall in eastern North America, heating oil and natural gas were down -43% and -32% respectively. There were very few commodities that were positive in 2015.  Cocoa was up +9.9% and OJ was +4.5%, but other breakfast-related products such as coffee and oats were down -30.4% and -31.1%, respectively.

The Canadian Dollar weakened against the US dollar, dropping to 1.3840 to close the month. For 2015 the Canadian Dollar dropped 19.3% against the US Dollar.  Against the Euro, the Canadian Dollar also weakened and closed the month at 1.5029.

 

Market Commentary

December was mostly about what the major central banks did or didn’t do.  As expected, the US Federal Reserve finally raised interest rates by 0.25%.  As the stock markets had been expecting this for months and months, the reaction was indifference.

The Bank of Canada (BoC) left interest rates unchanged in December, but created a stir when a long overdue update to their policies was released.  Since the previous version was from before 2008 and did not contemplate the benchmark interest rate going negative as several European central banks have done, the new policy document provided this option.  The press of course seized on this and Mr. Poloz had to reassure everyone that negative interest rates in Canada was unlikely but would be a possibility in a crisis like 2008.  He further noted that the interest rate cuts from earlier this year have yet to take full effect in the economy and can be expected to do so in the next 12-18 months.  Reading between the lines, this would imply that no further interest rate cuts are likely unless the economy really runs into trouble.

Markets had been expecting the European Central Bank to expand its quantitative easing program in December after comments by the Bank’s president at the start of the month.  However at the Bank’s policy meeting no changes were made, which the stock markets did not respond to well.  Meanwhile in Japan, the Bank of Japan expanded its quantitative easing program and would buy more ETFs, REITs and longer dated bonds than it had previously.

 

December 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% in November to 7.1%.  Full time employment grew by 36,600, but this was not enough to offset part time job losses of 72,300.

Building permit activity in October rose 9.1%, which flowed though into November with new housing starts rising 7.2%. Housing prices rose 0.3% for October and were up 1.5% from a year ago.  These numbers pale in comparison to the recently released figures from the BC Property Assessment Authority.  Single family homes in the Vancouver area rose between 15% and 30% from July 2014 to July 2015, depending on the suburb.  Condo and townhouse prices also rose, but at about half that rate.

Inflation for November was -0.1%, or +1.4% over the last year. Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest remains in line with the Bank of Canada’s target of 2%. Retail sales in October rose +0.1%, and were up +1.9% over the past 12 months.

The October GDP report was lower than expected at 0.0%. The Bank of Canada’s next meeting is in March when a change in the benchmark interest rate is not expected unless another major shock to the economy occurs, similar to the drop in oil prices.

 

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