There were mixed results on the global capital markets during the second quarter of this year. While bond prices rose, stocks in general pulled back. Even then, markets such as Germany and Japan made gains, while China and North America markets were down.

The performance of the S&P/TSX Composite Index here in Canada was notable in that by mid-June it had experienced a technical correction broadly defined as a decline of 10% or more. However, Canadian stocks rebounded at the end of the quarter and the index registered a decline of 5.2% for the three months and a slight gain of 0.2% for the year. U.S. stocks fared better as the S&P 500 Index was flat for the quarter and up 6.0% for the six-month period (in U.S. dollars).

Market observers point to several reasons for the Canadian market’s lagging returns this quarter. Prices for goods such as food and fuel have risen dramatically as the global economy recovers. However this has also contributed to higher inflation in many emerging markets.

Central banks and governments in developing countries have taken steps to cool their heated economies, leading to lower commodity prices, which then affected the commodity driven Canadian stock market. Markets around the world were also rattled by renewed government debt concerns in Europe and the U.S., while consumer debt and unemployment levels in developed markets remained elevated.

Despite these concerns, investment veterans such as Gerry Coleman of CI Investments-Harbour Advisors and Daniel Bubis of Tetrem Capital Management, have recently expressed that equities will continue to outperform other asset classes. Both individuals have pointed out that equity market valuations remain reasonable and corporate fundamentals are healthy. The global economy, while not uniformly robust, is still supported by impressive growth in developing economies, low interest rates and strong credit markets.

From March 2009, when the stock market reached a bottom during the financial crisis, until March 2011, the Canadian stock market had surged over 90%. Historically, pullbacks of 5% to 10% have been a normal part of such ongoing market advances.

In this environment, portfolio diversification, both by region and across asset classes can provide a defense against market volatility, while allowing you to benefit from market growth. During the last quarter as an example, bond prices rose as equitys fell. By ensuring a diversified portfolio across different types of investments classes it will help smooth out the highs and lows over time.

If you would like more information on this topic or would like a review of your current financial plan, please call 778-478-9759, or e-mail kzakus@northbayfinancial.com

This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, or life insurance, and should not be taken as providing, investment, financial, legal, accounting or tax advice. All services provided through NorthBay Financial Services. Mutual funds are provided through Sterling Mutuals Inc. Insurance is provided through multiple carriers. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds and Segregated funds are not guaranteed, their values change frequently and past performance may not be repeated. The information in this letter is derived from various sources, including CI Investments, Signature Global Advisors, Harbour Advisors, Globe and Mail, National Post, Financial Times, and Bank of Montreal Economics. Index information was supplied by TD Newcrest and Yahoo! Finance.