January’s market performance was certainly not the start to 2016 that we were expecting.  Despite the dour market sentiment, nothing has really changed with respect to the actual economic environment: China continues to slow, global growth is sluggish, and inflation is tepid.  While China finds their footing with respect to managing their currency, markets will remain wary.  The dramatic fall in oil prices, while thankfully not demand driven, is a drag on economic growth due to reduced capital spending.  On the plus side, cheaper energy costs will eventually produce some economic stimulus.  Global central bankers have proven their mettle, evidenced by their adept responsiveness to managing deflation and money supply.  Concurrent with the American recovery, the U.S. Fed is likely to only gradually raise rates.  While financial markets have overreacted to the negatives and volatility will likely be the norm, the yield alone on equities still surpasses bonds – making them even more attractive at current valuations.

The month’s first half saw equity markets begin the year with a sustained free-fall.  Global equities lost more than $3.8 trillion in a fortnight, triggered by a renewed sell-off of Chinese equites.  Ongoing worries about China’s slowing economy were exacerbated by amateurish Chinese policy missteps.  With the end on the ban on large investor equity sales coming into play, investors went for cover.  The sell-off was met with more anxiety as low circuit-breaker thresholds of 5 to 7% were quickly triggered on two occasions in the same week.  Regulators quickly abandoned their misguided trading policy and extended their ban on large investor equity sales.  All the while, China’s manufacturing sector contracted for the tenth consecutive month and the once-robust services sector experienced its first decline.  To fan the flames even further, China’s central bank stumbled with eight consecutive days of lowering its guidance rate – the yuan responding with its biggest fall in five months.  Geopolitical risk also contributed to the negative sentiment with North Korea announcing a successful test of a hydrogen nuclear device.  Markets couldn’t be consoled by continued improvements in the U.S. jobs data, with three hundred thousand new jobs added in December alone.  What’s more the labour participation rate also rose as discouraged job-seekers re-joined the labour force.  Wage growth, while flat in December, grew 2.5% in the last year.  Canadian and U.S. equities retreated 5% and 8% respectively.  Europe was also down 9% while the Shanghai composite index fell 12%.  Oil fell 15.5% (a 12-year low) on news that sanctions on Iran would soon be lifted – compounding the ever growing global supply glut.  The once high-flying, loonie followed oil down 3.4% against the greenback, to US $0.69 – a level not seen since April 2003.

During the month’s second half, amidst further volatility, equities partially recovered – helped by their first weekly gain of 2016.  Investor sentiment remained at the mercy of oil prices (initially taking large-cap benchmarks down nearly 4%) as oil plunged below $26/bbl. (-8%) before a two-day upward retracement to $31/bbl.  European markets vacillated but rebounded after Mario Draghi’s supportive comments which indicated additional forthcoming quantitative easing measures and that the ECB is prepared to issue further monetary stimulus as soon as March.  The IMF’s Christine Lagarde also helped market sentiment as she publically expressed confidence in the Chinese authorities’ ability to use the monetary and fiscal tools at its disposal to smooth the transition of its economy to a consumption-led one.  In North America, both the U.S. Fed and BoC maintained their overnight lending rate.  The FED opted to ignore the recent uptick in inflation, instead focusing on the weak Q4 growth reading and recently heightened financial volatility.  In Canada, the BoC left rates on hold despite the weaker economic backdrop – opting instead for a wait-and-see approach as the Canadian economy works through lower oil prices and the gains from a weaker loonie.  Adding to the renewed positivity in market sentiment was the BoJ matching its words with action.  In Japan’s ongoing battle with deflation, the BoJ slashed interest rates to -0.1% on current account balances while maintaining its ongoing qualitative and quantitative program – currently at 80 trillion yen per year.  The move confirmed the BoJ’s willingness to take aggressive steps to meet its 2% inflation target.  For the last two trading weeks of the year, Canadian, U.S. and European equities rallied 6%, 3% and 1% respectively – largely unaffected by the Shanghai index which was down 6.1%.

At the end of the month, Canada’s TSX lost the least (-1.2%) with most of its major sectors in the red but buoyed by Consumer Staples (+2%) Telecommunications (+2%), and Utilities (+5%).  The S&P 500 slipped 5% while the EAFE indices declined 7% – both experiencing a tailwind from a 1.7% drop to the loonie – bringing them to -3.3% and -6% respectively.    The U.S broad-based bond index appeared to reflect the “risk-on” mood – finishing up 1.5% for the month while Canadian bond investors had a 0.4% gain to their index.