Last year, North America’s four major stock market indices provided pretty accurate and succinct summaries of how the economies of the U.S. and Canada performed overall.
At 2015’s year-end, the closing value of the broadly-based S&P 500 index was virtually flat (-0.7%) versus its level of 12 months prior.
The more narrowly-focused Dow Jones Industrials index (DJI) was down year over year, but only slightly (-2.2%).
Technology-driven NASDAQ was ahead to a respectable degree (+5.7%). The knowledge-based sector was the major driver of the U.S. economy throughout the past year.
Meanwhile, the commodity-dependent Toronto Stock Exchange (TSX) faltered significantly (-11.1%). Mainly on account of the battering suffered by the nation’s energy sector, with the global price of oil down more than 50%, Canada’s economy stumbled through several periods of quarter-to-quarter and month-to-month gross domestic product (GDP) contraction.
When the Great Recession was raging at full force in both countries, the S&P 500 plummeted 38.5% from year-end 2007 to year-end 2008;the DJI fell 33.8%; NASDAQ declined by an even greater 40.5%; and the TSX nose-dived 35.0%.
There were quite substantial rewards to be gleaned, however,in the following six years, from 2009 through 2014. During that period, the S&P 500 managed an average annual gain of 15.1%; the DJI, +12.8%; NASDAQ,an outstanding and astonishing +21.1%; and the TSX, +9.2%.
Within that historical context, 2015 wasn’t a disaster for investors. But neither did it warrant being stamped with a ‘happy face’.
The consensus among analysts entering the New Year seems to be that U.S. equities will continue to be hard pressed to make headway,especially with the Federal Reserve now set on a course of gradual interest rate increases.
The 2016 kick-off report, based on December data, from the Institute of Supply Management (ISM) was not encouraging.
ISM’s latest Purchasing Managers’ Index (PMI), at 48.2%, was below 50.0% for the second month in a row. In November, it had been 48.6%, down from October’s 50.1%.
The ISM has established a long-standing relationship between the PMI’s value, national output and the activity level of manufacturers. As long as the PMI is above 43.1%, ‘real’ (i.e., inflation-adjusted GDP is growing), but if it fails to exceed 50.0%, manufacturers are seeing their shipments recede. The high-valued U.S. dollar is proving to be a formidable impediment to winning foreign sales contracts.
America isn’t the only country with a manufacturing headache at this time. China is attempting a tricky transition. The authorities in Beijing are promoting a reduced emphasis on export sales to be counterbalanced by a rising tide of domestic consumer demand.
So far, progress in meeting this hoped-for outcome has fallen somewhat short. China’s GDP growth expectations have been subject to downward revisions. This has broader implications. A Chinese banking sector already replete with questionable loans doesn’t need the additional strain of a poorer-than-anticipated outlook.
Europe’s economy, albeit in small and halting steps, appears to be finally coming around.
Europe may be the world’s regional economy with the most improved growth prospects at this time. Mario Draghi, President of the European Central Bank (ECB), is continuing to pursue a policy of ultra-low interest rates and quantitative easing.
The German DAX 30 stock market index closed 2015 +9.6% compared with December 31, 2014.
As for Canada’s share prices, a number of 2015 year-end synopses, with accompanying 2016 projections, have spoken of the TSX possibly outperforming the U.S. indices. There are several arguments in support of this contention.
Stock prices can be subject to pendulum swings that over correct. The TSX may have fallen victim to such a phenomenon and there are now high-quality listed companies offering catch-up opportunities.
And although there is the danger of a further mild depreciation, the low-valued ‘loonie’ (i.e., Canada’s currency) presents foreign investors with bargain prices.
More than anything else, though, a more notable strengthening in the TSX will be contingent on the global price of oil bottoming out in 2016 and providing at least the hint of a return to an upwardly-rising path.