U.S. stock markets surprise with rise to record highs

If there was one big surprise in 2013, it was the strength of U.S. financial markets.

Despite the year beginning with talk of the U.S. going off the ‘fiscal cliff’ and the need to increase the government’s debt capacity, followed by the actual shutdown of government in October, U.S. stock markets shrugged off the government dysfunction — along with other tepid economic indicators — and hit record highs.

The continuation of the U.S. Federal Reserve’s quantitative easing program, which saw the Fed buying $85 billion in treasuries every month through 2013 to support low interest rates, didn’t exactly suggest a strong economy.

Nor did the persistently high unemployment rate, which only touched seven per cent with November employment numbers.

Even then, the fact more Americans are opting out of the job market — the participation rate is down to 63.2 per cent — coupled with the amount of widespread underemployment, remains symptomatic of an economy that still hasn’t managed to grow at a rate matching that of other postrecessionary periods.

Yet with one trading day left in 2013, the Dow Jones Industrial Average had gained more than 25 per cent on the year, while the NASDAQ composite finally exceeded its previous record of 2000, up more than 40 per cent on the year. The S&P500 is up almost 30 per cent.

Even Japan’s stock market had gained 55 per cent by year’s end — marking its best performance in six years and hitting the highest level since 1972.

It was a different story in Canada.

Being heavily weighted to the resource sector meant Canadian stock markets underperformed U.S. markets for yet another year.

The S&P/TSX had gained 8.1 per cent with one trading left, not exactly stellar, but in keeping with the general sentiment regarding prospects for commodities around the world. With the index weighted 36 per cent to natural resource stocks — energy (24 per cent) and mining (12 per cent) — it only offset the gains of the financial services sector. While the S&P/TSX Capped Energy Index has managed a gain of almost 10 per cent and the S&P/TSX Capped Financial Index rose by almost 21 per cent, it was the Materials Index, where the mining stocks reside, which lost 30 per cent of its value.

Prices for oil were flirting with a 10.5 per cent gain for the year — on a trading range that swung between $85.61 US per barrel and $112.24/bbl — while natural gas prices surprised many, with natural gas futures in the U.S. up 30 per cent on the year and the price for AECO spot rising almost 28 per cent.

The swoon in prices for gold and copper didn’t help the overall performance of the broad S&P/ TSX, as gold fell from a 52-week high of $1,697.80 US an ounce, to $1,212.90 by Monday, while copper lost almost five per cent of its value.

The market’s performance once again highlighted two persistent flaws in the Canadian economy: the lack of market diversification for its natural resource production and second, the lack of economic diversification across the economy.

It didn’t help either that 2013 was marked by the almost unrealistic turn of events at Blackberry — long a beacon of what was possible with research, development and innovation. The much-hyped Z10 and Q10 failed to live up to expectations, which resulted in a monumental housecleaning at the company as a sale process came up with a big fat goose egg.

The energy space was marked by a lack of activity, with the only corporate deal of size being ExxonMobil’s purchase of Celtic Exploration — as a way to bolster its shale gas portfolio in British Columbia.

If the year began with discussions about pipelines and politics — and the much-needed approvals — it ended on the same note. While 2013 began with high hopes for U.S. government approval of the Keystone XL pipeline, it was not to be.

What did happen, however, is that the National Energy Board — through its Joint Review Panel — tabled a favourable ruling on Enbridge’s proposed Northern Gateway pipeline to the West Coast. It was certainly seen as a step forward.

As the year wore on — and there were more visits to Asia by Canadian executives, both energy and nonenergy, as well as federal and provincial officials — it became clearer Canada’s inability to move quickly on infrastructure issues was already causing potential customers to start hedging their bets and looking elsewhere for supply.

The lack of interest in energy stocks translated into a lack of access to capital. This was compounded by the opaque Investment Canada rules put in place toward the end of 2012. The numbers continue to speak for themselves, with only $2 billion coming to Canada in terms of foreign investment in the energy sector compared with $27 billion in 2012.

The oilpatch was not the only segment of the economy to feel the pinch of new foreign investment regulations.

Not once but twice were foreign bidders prevented from helping the federal

… the sentiment will be more along the lines of good riddance rather than nostalgia

government achieve its apparent goal of establishing a fourth telecom carrier in Canada as a way to boost competition and decrease the sometimes egregious fees Canadians pay for their mobile services.

Turnover in the C-suite was another theme for 2013 — either in terms of actual departures and replacements that took place through the year or those that were announced and will take effect in 2014.

Canada’s financial services industry — between the retirements of Royal Bank CEO Gord Nixon, Ed Clark with TD Bank or Rick Waugh at Scotia Bank — is about to lose those who stewarded the country’s chartered banks through some very uncertain times following the 2008 financial crisis.

Those who attended the Spruce Meadows Round Table in September 2008, days before markets collapsed, won’t easily forget Waugh saying one of his biggest concerns was liquidity in the financial system. Less than 10 days later, he — along with all the global financial players — were living that nightmare.

And who can forget the departure of Bank of Canada Governor Mark Carney who was named the first non-British-born governor of the Bank of England.

Carney, through his transparent approach to running what was long seen as a very stodgy institution, succeeded in making Canadians care about interest rates and the risks posed to the Canadian economy. If ever one could apply the term “rock star” to a central banker, it befits Carney.

The oilpatch had a few transitions in the C-suite of its own — along with a little drama.

The year saw the arrival of two new chief executives at Calgary majors — Doug Suttles at Encana and Rich Kruger at Imperial Oil — and speculation about who might replace Talisman’s Hal Kvisle in 2014.

Both Talisman and Encana announced major initiatives at their respective companies, with Talisman arguably being pushed a little harder as a result of activist investor Carl Icahn buying a 7.37 per cent stake and installing two directors on the board.

Barrick Gold also saw a changing of the guard — the result of very grumpy investors — with founder, chairman and president Peter Munk finally handing over the reins to the very capable John Thornton.

What was clear, however, in a broader sense, was that activist investing is alive and well in Canada in 2013.

Whether it was Agrium, Talisman or Barrick — it’s clear that, absent ownership restrictions, Canadian companies seen to be underperformers are seen as fair game. And that goes for companies that are truly underperforming as much as it does for conglomerates where the subsidiaries are important to the overall business of the company.

On balance, 2013 isn’t going to be a year anyone is likely to recall fondly, other than perhaps those record highs hit by U.S. stock markets.

It was a tough year on many levels, the political as much as the economic.

It’s because of this that when the clock strikes midnight Tuesday, the sentiment will be more along the lines of good riddance rather than nostalgia.