Chalten Investment Review – Q4 2016

Welcome to the Chalten Investment Review for Q4 2016.   At the end of this past quarter and year we reflect and feel relief that we don’t hang our hat on the crystal ball of prediction!  After the rocky start stock markets had in January and early February, who could have expected the rebound through the rest of the year?  As the US election loomed, uncertainty clouded the crystal ball once again and the result turned the crystal ball into more of a snow globe…yet stock markets continued upwards.

It’s difficult to predict what’s going to happen with elections, referendums or anything else and it’s sometimes even harder to predict how financial markets will react to those events.  There were no shortage of opinions about what might happen post the US election, for example, and in the aftermath we were asked by many what, if anything, should be done with their investments.  We answer with another question – “Are your goals different post the election?” taking inspiration from Ron Lieber in the New York Times who stated it plainly:

 “Once upon a time — like, say, last week — you had an investing plan that was based on goals that may come years or decades from now. Perhaps you’re hoping to buy your first home. Maybe you’re trying to save enough to send a couple of children to college. You hope to retire by age 67.  Has any of that changed? If it hasn’t yet, then it’s not clear why your investments should.”

Rob Carrick of the Globe and Mail wrote:

“Uncertain times are bullish for market strategists, gurus, pundits and such who want to build a brand by offering clarity about what happens in financial markets….Ignore it all. Do not remake a portfolio that was sensibly diversified using bonds and Canadian, U.S. and international stocks….– why tilt a portfolio on pure speculation?”

Both wise and recommended approaches!  Speculating and investing are very different things.  You are an investor and investing successfully is a long-term game.  As our wise friend Mike says, “I’d bet $50 but not my portfolio”.  Indeed!   So what should you do in the face of uncertainty?  As we wrote in November:

“Ignore the noise, Stick with your plan, Ride through short-term volatility, Re-balance if necessary, Observe and reflect…”

Going forward, whether we continue to experience uncertainty and surprise or relative calm (and remember that sometimes our level of worry is shaped simply by our chosen reading sources) there are certain tenets of investing that carry us through all environments.  We wrote about some of those in Q4 when we recommended that investors educate themselves about fees, be aware of the evidence that shows how difficult it is for active mutual fund managers to beat the market and the important role of saving and discipline in the success of a long-term investor.   All these topics are relevant for any environment and we encourage you to read these pieces if you haven’t done so already or to reread them if you have already seen them.         

Q4 Market Review

Global equity markets increased overall in the 4th quarter.  The Canadian stock market continued it’s 2016 rebound in Q4 with especially strong performance from the resource sectors.  In the US, the flow of information was dominated by the presidential election and the Federal Reserve raising interest rates. In Europe, while the value of the pound dropped, the fear over Brexit seemed to recede further, the ECB continued monetary easing and economic recovery continued at a slow pace.  Asian stock market performance was mixed with Japanese markets up over the quarter while the Yen fell.  The rest of Asia fell over the quarter along with many Emerging Markets with some attributing the drop to concerns over future US foreign, trade and economic policy.  From a style perspective, value stocks largely outperformed growth stocks and small cap stocks outperformed large cap stocks.  The evidence shows that these patterns tend to hold over the long-run, but certainly not every year.  The important thing is to be invested in the market at all times so that when risk premiums are rewarded, your portfolio will benefit.  In bond markets, yields were up during Q4 and that meant lower prices, especially on long-dated bonds. 

  • The total return on the Canadian stock market was 4.54% for Q4 and just over 21% for 2016. Canadian stock markets delivered the strongest performance among develop markets globally in 2016, in stark contrast to 2015 when Canada delivered the weakest performance.
  • In the US, the total net return on the S&P500 in Canadian dollar terms was 6.10% for Q4 and 7.91% for 2016.
  • The total net return for the S&P Global ex-US BMI Index of stocks barely remained positive at 0.69% in Q4 and 1.32% for 2016 as a whole.
  • The Canadian dollar gained just over 3% against the US dollar during 2016 despite losing ground in Q4. This contrasts with 2015 when the Canadian dollar lost more than 19% against the US dollar.
  • Total returns for Canadian bonds were -3.25% this quarter, lagging behind the return from US bonds in CAD terms but ahead of Global bond returns. Canadian bonds returned 1.47% for 2016 as a whole.  Yields on bonds remain low, and despite increasing yields bonds can remain an important part of a sensibly diversified portfolio.  Remember the purpose of bonds is to act as an uncorrelated shock absorber when equity markets turn down rather than as a return enhancer in their own right. 

Financial Planning topics of interest

A new year means new TFSA and RRSP contribution room and new CESG eligibility to bolster RESP contributions. The province of BC has also extended the age eligibility for its relatively new BC Training and Education Savings Grant.  The next two months will bring tax receipts to your inbox/mailbox so please look out for those and hang on to them to assist with your 2016 personal tax filings.


We’ll close by saying that 2016 demonstrated very clearly that performance rotation between broad asset classes and among regional stock markets and currencies can happen in a dramatic fashion and the best way to benefit and protect yourself is to diversify and rebalance when necessary.  Diversification will mean you always dislike something in your portfolio but there should also be something to celebrate– we encourage investors to focus on the positive and feel confident that a disciplined and diversified approach will serve you well over the long run.   

All the best for the rest of 2017!