- Corporate profits rose 3.7% in the third quarter, following a 7.0% decline in Q2. On a year-over-year basis, profits were up 3.1%.
- The gains were led by the manufacturing sector (+6.3%), which accounted for nearly a third of the total increase. However, the bounce back in manufacturing profits stemmed from the petroleum and coal industry, as plants came back online following partial shutdowns during the second quarter. In fact, profits in the manufacturing sector would have otherwise fallen during the quarter, as chemical, plastics and rubber (-11.7%), metal (-19.4%), and motor vehicle and parts (-18.9%) manufacturers all recorded double digit declines in Q3.
• Financial markets’ mood started to improve this week, with equity markets making up some lost ground and the Canadian dollar back above parity.
• Canadian data, however, shone a light on the biggest domestic risk to the economy – heavily indebted consumers – and the impact on Canadian retailers.
• Consumers can no longer be the engine of economic growth. Add high levels of cross-border shopping and limited pricing power to that modest backdrop, and it would seem Canadian retailers are getting a lump of coal in their stockings this year.
The term “fiscal cliff” was coined by Ben Bernanke, Chairman of the Federal Reserve, in early 2012, when he testified before Congress saying, “Under current law, on January 1st, 2013, there is going to be a massive fiscal cliff of large spending cuts and tax increases.” The phrase quickly gained popularity as a useful catch-all to describe a combination of year-end policy events including significant impending tax increases, sharp sequestration budget cuts, and the expiration of several stop-gap provisions ranging from doctor reimbursements to unemployment benefits.
Today, the term “fiscal cliff” dominates the local headlines, national news, and blogosphere. But what exactly is the fiscal cliff and how does it impact you? I have put together this primer to break down the fiscal cliff, to share facts on how these policies might impact you and your job, and to give you insight into my views on and actions to avert our nation’s most pressing and significant problem.
Investors continue to buy gold at historically high levels, but investment demand was down from particularly high levels seen during the same period in 2011. The most significant contribution to the fall in gold demand came from the drop in bar and coin investment. This was largely reflective of a lack of strong inflows in certain (notably Western) markets, rather than the emergence of any strong profit-taking activity. Demand from this category of investment was 30% weaker year-on-year at 293.9 tonnes, translating to a 32% decline in value to US$15.9 billion.
Most major equity markets were hit hard during the week as investors grew frustrated and anxious about fiscal cliff risks and as the battle between Hamas-led Palestinians in Gaza and Israel resulted in more than 1,000 rockets being fired between the two sides.
While the biggest selloff occurred on Wednesday— the S&P 500 fell 1.4% that session—markets across regions dripped lower throughout the week.
Negotiations to avoid the year-end fiscal cliff have barely begun. So far, public statements out of Washington have included no surprises; the Democratic and Republican sides are playing their predictable roles.
• Risk sentiment has soured significantly, the Canadian dollar slipped below parity and equity markets slid for a second consecutive week.
• Canadian economic growth is expected to clock in at a disappointing sub-1% pace, with most of the weakness concentrated in trade. Manufacturing sales rose 0.4% in September 2012, almost fully led by aerospace products. Excluding this industry, sales were down 0.7%. The existing home market also remained a sore spot with sales down 0.1% in October, a seventh decline in ten months.
• Looking forward, economic growth should pick up to a more healthy 2.0% annualized pace in the final quarter of the year, supported by improving U.S. demand and Canadian consumer spending.
• The advent of shale gas production in North America has radically changed the game for natural gas markets over the past few years. First and foremost, it has resulted in far lower natural gas prices than would otherwise have been the case. As the world’s third largest producer, this has both positive and negative implications for Canada.
• On the negative side, the distance from major North American markets puts Canadian natural gas production at a competitive disadvantage to U.S. shale plays. The result has been lower imports of gas from Canada, and declining levels of production and reduced revenues from existing output.
• On the positive side, lower prices are a positive for consumers of natural gas; be they households, businesses or industry. Moreover, as lower prices induce switching from more polluting fuels like coal, lower greenhouse gas emissions are another benefit.
• A key difference for Canada is the expected growth in demand for natural gas from the industrial sector. Expansion of the oil sands is expected to be a major driver of gas demand going forward. With Canada’s traditional export market now able to meet far more of its own natural gas needs, Canada needs to find new customers at home and abroad to extract the greatest value for our gas resources.
• Our assessment of U.S. long-term financial returns, based on economic fundamentals, suggests that a diversified portfolio should deliver an average annual return of between 4.5% and 6.5% over the next decade.
• Cash is expected to provide an average annual return of 2.25%. Bonds will likely suffer capital losses, as interest rates rise from their current lows, but should return 2.5% for Treasuries, 5.5% for corporate bonds, and 4.5% for municipal bonds. A balanced fixed-income portfolio is expected to return 3.75%, on an average annual basis.
• Equity markets across the U.S. and other developed economies will likely return, on average, about 7.0%. Some exposure to emerging markets could boost equity returns, but the additional return would come at a price of an increased risk profile.
Armed with more modest economic growth forecasts than previously envisioned, the government now anticipates a deficit of $26 billion (1.4% of GDP) in fiscal 2012-13. This represents a $5 billion miss vis-à-vis the 2012 budget estimate. The weaker momentum trickles through the entire fiscal plan. The return to surplus is now pushed out to 2016-17, one year later than the original deficit reduction timetable. For markets, investors and credit rating agencies, it is the medium-term plan that garners the most amount of attention. Therefore, consensus on today’s release should be that it is inherently difficult to restore fiscal health in this modest economic climate. That being said, the government is sitting on small deficits and it has a multi-year road map towards surplus.
»» Equities stumbled and safe-haven bonds rallied as the war over taxes and spending cuts began in Washington and as Europe’s challenges bubbled back up to the surface. Greece re-appeared on the radar screen.
»» It’s time to stop cheering or bemoaning the U.S. election results. The fiscal cliff is more important for financial markets and economies across regions. (page 3)
»» Global Roundup: Updates from Canada, Europe, and Asia Pacific. (pages 3-4)
The votes have (mostly) been counted and years of campaigning came to a close this week. For the last several months, economists and market watchers alike have had a hard time focusing on anything but the election. Well, now that it is done, markets can focus on bigger things – like the looming fiscal cliff.
In fact, for all the hoopla, the election leaves the state of U.S. politics pretty much where it was before the election. The President is still Barack Obama; the House is still run by Republicans under John Boehner, and the Senate is still run by Democrats under Harry Reid. These three men will now have to forge a path to compromise that avoids plunging the U.S. back into recession, but also takes steps to put U.S. deficits and debt on a sustainable path.
The Towers Watson Pension Index has decreased slightly in the third quarter. The positive asset returns were offset by an increase in pension liabilities due to a decrease in the liability discount rate. The net effect on our benchmark plan was a decrease of 0.3% in the Towers Watson Pension Index (from 56.3 to 56.1) for the quarter.
This is a great summary of the markets' recent performance - Stock and Bond Markets, Benchmark Portfolios - Month-To-Date, Quarter-To-Date, Year-To-Date and 1-Year returns.
- Murphy’s Law says that anything that can go wrong will go wrong. First, the economy unexpectedly contracted by 0.1% in August, representing the first decline in six months. Second, consumer and business insolvencies rose by 5.4% and 5.1%, respectively in July. Third, job creation came to a standstill in October, well short of expectations.
- Behind the string of negatives, there were also some positive developments. China’s PMI increased, which helped boost morale surrounding the health of the global recovery. Canada’s export-based economy stands to benefit from this development.
- Canada is expected to emerge from this soft patch in the fourth quarter. However, the near-term domestic outlook remains modest at best. Due to the many global headwinds present, the trajectory should stay bumpy over the near-term.
A majority of active funds underperformed their respective benchmarks across all asset classes studied in the Mid-Year 2012 SPIVA Australia Scorecard (see Exhibit 1). With the exception of the Australian equity small-cap category, at least 70% of active retail funds underperformed the benchmark over the past year. The same is true for the three-year period.
Over the past five years, approximately 69% of active retail Australian equity general funds underperformed the S&P/ASX 200 Accumulation index. The portion of underperforming funds increased to an even larger majority across the one- and three-year time periods, with at least 72% of active Australian equity funds failing to beat the index.