Work left to be done on fiscal cliff

Big Picture

Work left to be done on fiscal cliff; Fed split on bond buying; China rebounding

The last-minute resolution to avert the fiscal cliff was welcomed by investors around the world but the cheering may not last long. To get the deal done a number of loose ends were left untied including tough decisions on spending cuts and an agreement on the debt limit. Both issues loom in the weeks ahead and a repeat of the political brinksmanship demonstrated over the past two months may further undermine consumer and business confidence.

Meantime, news of splits among US Fed officials on the duration of its current bond-buying program took investors by surprise Thursday. The divisions were disclosed in minutes from the Fed’s Dec. 11-12 meeting. Some officials want to continue the bond buying through 2013; others would like to see it end sooner while still others would like to halt the program right away. The Fed recently tied the length of its bond-buying program to unemployment saying it wanted to see the jobs picture improve “substantially”; unemployment stood at 7.8% in November and December’s number, released today, remained unchanged.

In China, the country’s manufacturing activity hit a 19-month high in December as a closely watched purchasing managers index rose for the second consecutive month. The back-to-back increases snap 12 successive months of contraction. The country’s strengthening manufacturing sector and higher electrical usage rates have spurred optimism that China is bouncing back after last year’s slump.


All green for major North American stock benchmarks in 2012

After closing out the year on a strong note due to fiscal-cliff optimism, stocks took off during the first trading day of the new year on news a deal had been reached. For the holiday-shortened three-day period the Dow steamed ahead by 453 pts. to end Thursday at 13,391, the S&P 500 jumped 56 pts. to end at 1,459 and Nasdaq rose 152 pts. to 3,112. In Canada, the TSX moved higher 154 pts. to close at 12,470. For the year, the TSX ended up 4%, the Dow 7.3%, the S&P 500 13.4%, and NASDAQ 15.9%.

Our Recommendation

Macro data supports expectations for equity out-performance

  • Equities - Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “Stronger economic data is likely to result in upward revisions to corporate earnings in the second half of 2013. A diversion of funds from fixed income into equities could also result in multiple expansions.  Our preference is for equities over bonds and cyclicals over defensive stocks.  Given our constructive view toward the US economy, we recommend increased exposure to US 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.”


This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca

The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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