2016 in Review


Two standout events — Brexit and the US election — will mark 2016 in history. In both cases, equity markets reacted or overreacted sharply to the downside and then returned to pre-election levels. Both decisions will have long-term economic implications domestically and globally. The extent of the change resulting from each vote remains to be seen. Both decisions have also triggered greater uncertainty.

The Canadian equity markets continued strong throughout 2016, which was a bit unexpected, given the lack of good news for the Canadian economy. The commodity sector was the primary driver for a strong market in the fi rst half and the noncommodity sector was the driver in the second half of the year.

Domestically, the US market returns were strong in 2016. In Canadian dollars however, those US returns were muted by the relative appreciation of the Canadian dollar over the same time frame. The dollar rose sharply in the fi rst half of the year with the price of oil, then tapered off in the second half of the year.

One glimmer of good news for the future of the Canadian economy was the approvals of the Kinder Morgan Trans Mountain pipeline and the Enbridge Energy East pipeline. The approvals are just one of many hurdles, and it will be years before even one pipeline provides improved market access…that is, if either of the projects can withstand the protests and court challenges.

International equity markets were rocked by Brexit, and then played catch-up for the second half of the year. Britain’s actual exit from the European Union, which is still at least a couple of years away, will no doubt be a drag on the UK economy. The long-term impact to Britain is not currently reflected in the markets. For most of 2016, Canadian bond yields continued to decline further to unprecedented levels. Bond returns therefore were better than expected for much of the year. The bottom seemed to have been reached and Canadian bond yields began to improve for all maturities at the end of the year. US bond yield increases led the way earlier in the year, as sign of a stronger US economy.

The growth in the US economy has been supported by a robust job market with unemployment now under fi ve percent. Consumer spending makes up a very large part of the US GDP and is highly correlated with employment. Jobs and spending are expected to continue to drive growth in the US economy in 2017.

The common thread among analysts is that the next several years will see slower growth and greater volatility. Headwinds to economic growth include unwinding of quantitative easing, changing demographics, slower global growth, and rising interest rates.

As always, it remains important to stay focused on a disciplined and diversified investment approach with emphasis on the long term rather than events that might rock the boat in the short term.

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