May 18, 2012

January 10, 2012

How stock prices have performed depends on the timing of the data points

Alex Carrick

Chief Economist, CanaData

This is a time of year when many analysts choose to examine how well equities have performed.

Year-end closing prices versus previous similar milestones are most telling.

What becomes most clear is that such an assessment is all about the timing.

Whether or not one is a proponent of buying company shares for their potential gains is likely to depend on the dates chosen as the reference points.

For example, only one of North America’s four major stock market indices recorded a year-over-year increase in 2011 — Dow Jones Industrials (DJI), +5.5%.

The S&P 500 had the exact same index value at 2011’s conclusion as at year-end 2010.

NASDAQ was -1.8% and the TSX Composite, -11.1%.

The forgoing are comparisons over only 12 months. Those enthusiastic about stock market investing would point to substantial gains since the indices experienced their last troughs in February 2009.

That’s quite true. Versus early 2009, NASDAQ is +89%, the DJI +73%, the S&P 500 +71% and the TSX +47%.

But it really is all about perspective.

For all four major indices, it’s possible to find a value equal to or only slightly less than what they are right now more than ten years ago.

While this is interesting on its own, in a mathematical sense, it has taken on greater significance due to the proliferation of exchange traded funds (ETFs) offered by brokers.

ETFs are set up to mirror the performance of an individual index. They have become popular with many investors (for mutual fund holdings, etc.) because they remove some of the risk that comes with more narrowly-based portfolios.

It is rather shocking to realize the S&P 500’s current value of 1,258 at year-end 2011 was first matched 13 years ago in January 1999.

The story is similar for the other indices as well.

NASDAQ was as high as it is now in June 1999.

Admittedly, NASDAQ is a special case. It experienced an artificial peak in January 2000, when the dot.com boom suggested technology stocks could only go higher.

Look how wrong that turned out to be. NASDAQ would have to almost double in value to return to its once-remarkable glory.

The DJI is currently only slightly higher than it was in late 1999.

The TSX is marginally above where it was in the summer <0x000A>of 2000.

These aren’t great returns for all the expenditures made in terms of research efforts and other opportunities lost while staying the course during the intervening years.

Of course, there have been considerable oscillations in exchange values over the past ten years, meaning solid returns if one got the timing right. On the flip side, one might also have suffered heartbreaking losses.

The Toronto Stock Exchange encountered particular headwinds last year. One of its former stars, Research in Motion (RIM) fell into a tailspin, losing three-quarters of its valuation.

The company first drew fire when its PlayBook tablet failed to win consumer acceptance.

A further black eye was delivered when Blackberry mobile phones were put out of commission by a network malfunction that lasted several days in the fall.

But it was really a faltering commodities sector that hamstrung the TSX.

The outlook for growth in emerging markets has become more uncertain on several counts.

Debt problems have lowered growth expectations for Europe, which is a prime destination for the export sales of China and other Asian nations.

Furthermore, China is encountering problems of its own making.

Earlier excessive government stimulus has led to price bubbles in both residential and commercial property markets.

Beijing has been forced to crack down on excessive lending by its banking sector.

The possibility China’s growth rate may fall below 8% for the first time in a decade has already caused world metal prices to pull back.

The picture is different in the energy sphere. More stringent sanctions against Iran — in an attempt to curb its nuclear weapons program — have led to bellicose threats from Tehran about closing tanker traffic through the Strait of Hormuz.

World oil prices are back on a climbing path. While this may be good for Canadian resource projects in Alberta and Newfoundland, it does present problems for personal spending.

If gasoline prices return to an upward trajectory, they will divert spending from other consumer goods.

For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.