Just like a well-needed dose of rain and heat during the growing season, we finally had a month in the markets that was showered with positive news.
Barron’s, an American business publication, capped the trend by speculating the return of the bull market.
This may be a bold prediction, given the false market bounces we’ve seen over the past couple of years, but with the major market indices such as the S&P-TSX Composite and the Standard and Poor’s 500 moving significantly above their respective 200-day moving averages, investors have become more optimistic.
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This is clearly reflected in two popular investor sentiment barometers: the American Association of Individual Investors survey and the Chicago Volatility Index.
The AAII now reads 49 percent bullish, significantly higher than the 20 percent reading in February.
The VIX, which measures the volatility of the U.S. equity market, has declined to 23.2, its lowest level since May 2002. This is viewed as positive because the VIX has a definite tendency to spike upward during market
declines.
Looking at asset class returns, equities outpaced bonds in April. Canada’s bell weather S&P-TSX Composite, including dividends, climbed 3.9 percent while the S&P 500 Total Return Index advanced 8.2 percent and the Nasdaq Composite rose 9.2 percent.
Bonds enjoyed more modest returns. The CIBC World Markets Bigar All Government Bond Index returned 1.5 percent and All Corporate Bond Index gained 2.2 percent. The six month returns also favoured equities.
Canada’s loonie climbed against the U.S. dollar, gaining 2.7 percent in April for a total year-to-date gain of more than 10 percent. Of course, currency shifts are always relative and it appears this move is more a reflection of greenback weakness than loonie strength.
The Euro advanced 2.5 percent versus the U.S. dollar in April and has appreciated 24.2 percent over the past year as investors have become increasingly uncomfortable owning U.S. denominated assets.
With the consensus expectation for another interest rate cut in the United States, the weaker U.S. dollar trend may continue.
From an equity market perspective, the industrials and materials sectors are most vulnerable to a stronger loonie, while sectors such as consumer staples and downstream energy stocks are more immune.
A strengthening Canadian dollar in April offset an otherwise stellar month in the U.S. equity indices.
In Canadian dollars, the Dow Jones Industrial Average rose 3.4 percent compared to 6.4 percent on a U.S. dollar basis.
The S&P 500’s 8.2 percent gain worked out to 5.4 percent in Canadian funds. Currency did not have a material impact on European returns as the loonie kept pace with the Euro in April.
North American equity markets were up nicely across the board in April, except for the S&P-TSX
Venture Composite. Canada’s S&P-TSX Composite climbed 3.8 percent, led by a 5.4 percent gain in financials.
In Canada, seven of 10 sectors finished the month with gains as did 72 percent of the companies listed in the S&P-TSX Composite.
The information technology sector enjoyed a strong month, up 14.2 percent. This was fueled primarily by Nortel Networks Corp.’s 20.7 percent rise. Despite the plunge in its share price in recent years, Nortel still carries a 44 percent weight in the sector.
Consumer discretionary companies, including retailers, merchandisers, auto parts and cable companies, enjoyed a broadly based advance. Bombardier Inc. and Canadian National Railway Co. helped the industrial sector post a 9.3 percent gain.
Offsetting the positive results, energy fell by three percent, materials by 1.8 percent and health care by 1.2 percent. These three sectors make up one-third of the total market capitalization of the index.
U.S. equity markets roughly doubled the performance in Canada.
Leading the charge in the U.S. were the financials with a 12.1 percent advance helping to close the valuation gap between Canadian and U.S. banks.
The consumer discretionary sector rose 11.6 percent, industrials 10.6 percent, materials 9.2 percent and the more volatile information technology sector nine percent.
For the most part, overseas markets rose in April, especially
Europe. The broad Bloomberg Euro 500 Index advanced 10.5
percent, helped by a strong contribution from German companies.
The German DAX index rebounded 21.4 percent in April, but was still down 41.6 percent from this time last year.
Asian indices were mixed during the month as the fear of Severe Acute Respiratory Syndrome appeared to have an effect on Hong Kong and Taiwan.
Ian Morrison is an investment adviser with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. or The Western Producer. Morrison can be reached at 800-332-1407 or by e-mail at ian.morrison@cibc.ca.
