2013 Financial Markets In Review

January 6th, 2014

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This blog post was originally published on the blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

U.S. Stock Market Had A Remarkable Year

2013 has been a great year for stock investors.

U.S. stocks made headlines by going on a tear - rising 32% during the year. The stock market rises by over 30% about once or twice in a decade, and last year was one such time that it did. It also happened to be the best return in 16 years.

To put the number further into context, if you purchased a 10 year Canadian government bond that yields 2.8% per year today, it would take 10 years for your money to compound into 32%. Of course, lest we get carried away, we should also remember that stocks have lost some 37% just 5 years ago. While stocks have the potential to rise fast, it has the potential to fall fast as well, and 2013 just happened to be a year when it rose fast.

But Canadian Stocks Didn't Do As Well

Canadian stocks on the other hand, wasn't as hot. The TSX total return index went up by 'only' 14% in 2013. Historically, U.S. stocks and Canadian stocks moved in lockstep with each other, so why did they diverge this time? The answer lies in commodities.

As Canadians, you probably know that our economy runs in large part on extracting and selling commodities such as oil, copper, potash, etc. In fact, resource companies consist of about 45% of the TSX Composite index. Therefore, whenever commodities do poorly, the stocks of related companies do poorly as well.

And 2013 has been a mixed year for commodities.

The Fall Of Gold

Commodity2013 Change In Price
Natural Gas +31.8%
Oil +7.2%
Copper -4.5%
Iron Ore -7.4%
Gold -28.0%

Looking at the above table, a couple of commodities stand out.

Natural gas rose almost 32% last year, so you would think this is great news for natural gas producers. Although this certainly is good news, natural gas prices were at historical lows last year, so even after a big gain last year, natural gas prices are still low comparative to previous years. Having been an oil and gas analyst in the past, I feel I have some insight into this industry, and I think the prices are still too low for many producers to make much money.

On the other end of the spectrum, gold has had a terrible year. This fact has been especially painful for those people (and there were many) who invested almost exclusively in gold and gold mining companies after having subscribed to the Austrian school of economics. These people believed that the Federal Reserve's money printing will lead to hyperinflation, and cause gold prices to shoot higher.

As the years progressed, it became more and more apparent that the advisors who predicted hyperinflation were simply wrong (see this article for an explanation on why we didn't get high inflation), and last year, the investors began to capitulate and sell their golden holdings. The selloff affected not just gold prices, but the many gold mining companies listed in the TSX as well, and this has partly led to the Canadian stocks' underperformance relative to U.S. stocks.

Bonds Had A Forgettable Year

While stocks enjoyed a good year, the same couldn't be said of bonds.

I'm on record for predicting poor results for XBB.TO(a medium to long term bond ETF), so let me give you an update. If you had invested in XBB.TO for the whole of last year, you would have lost 1.6% of your money, even after you account for interest payments. On the other hand, if you had invested in XSB.TO (a short term bond ETF) instead, you would have gained 1.4%.

However, I must say that it's too early to tell if I'm really right to recommend XSB.TO instead of XBB.TO. Things can change quickly in the financial markets, and a sudden downward movement in long term interest rates can vindicate people for choosing XBB.TO.

Bonds offer you protection for your money, whereas stocks and other higher risk investments do not, so I highly recommend having some portion of your money in bonds. However, if I were you, I'd still go with short term bonds over medium-to-long term bonds - for now.

That's how the financial markets did in a nutshell. A couple of days from now, I'll write my thoughts on how MoneyGeek's portfolios did overall last year.

This blog post was originally published on the blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

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