Macro momentum remains favourable

Big Picture

Fiscal cliff drama plays on after symbolic bill scuttled

North American stock markets rose this week on optimism that some consensus may be reached on US budget negotiations ahead of the year-end deadline. That optimism grew increasingly fragile as the week progressed and late Thursday Republican leaders cancelled a vote on a largely symbolic bill that the White House had said it would not support. Despite the lack of progress, markets continue to trade as if a deal will get done, but it appears holiday plans may be disrupted in Washington to see it through.

Economic releases were generally supportive of stocks over the past four sessions. The highlight of the week was a third-quarter GDP figure for the US which was revised higher from 2.7% to 3.1%; economists had expected the number to rise to 2.8%. In addition to the growth surprise, sales of existing homes were double what had been estimated and US home builders’ confidence also ticked higher. Meantime in Europe, a measure of German business confidence rose for the second consecutive month bucking a downward trend that had been in place since the start of the year. The news was viewed as especially heartening as fears had risen that German growth would be pulled significantly lower by its recession-plagued neighbours. German manufacturers have however been particularly agile, increasing exports to Asia as euro-zone demand weakened. Finally, the Bank of Japan provided additional monetary stimulus for its economy making it the fifth time the BoJ has expanded asset purchases this year – the most intervention since 2001.

Markets

North American markets advance despite cliff fears

All major benchmarks in the US and Canada moved forward over the four-day period covered in this report. In Toronto, the TSX rose 92 pts. to close Thursday at 12,388. South of the border, the S&P 500 added 30 pts. to close at 1,443 and the Dow advanced 176 pts. to end at 13,311. The S&P is trading near its high for the year and the Dow is now within 400 points of its 2012 high.

Our Recommendation

Macro momentum remains favourable heading into 2013

• Equities - Steve Uzielli, Portfolio Manager, Portfolio Advisory Group wrote: “Given continued improvement in the U.S. economy, the combination of attractive valuations and dividend yields which exceed bond yields, our preference for 2013 remains equities over bonds, and cyclical over defensive stocks.  Given our constructive view toward the U.S. economy, we recommend increased exposure to U.S. equities.”

• Fixed income - Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Our game plan for 2013 is to be positioned for pro-growth conditions in the first half. However, we will remain heavily focused on our tactical indicators as we believe range-bound market conditions will linger on.”

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