Copyright © 2019
Year in Review
2017 in Perspective,
from the January 2018 issue
Mass shootings, terrorist attacks and data breaches seemed to happen every week. North Korea played a game of chicken with a trigger-happy POTUS. Brexit talks, NAFTA negotiations, and Catalonia’s status swung back and forth. Home Capital nearly collapsed before a gent named Buffett came to the rescue.
Natural disasters. Russian relations with the West went from bad to worse amid deepening allegations of election meddling. Add it up and 2017 was a good year to avoid reading the headlines. Yet stock markets acted like it was just another day at the office — albeit not the Oval one.
Amidst solid economic growth and unemployment at long-term lows (41 years for Canada, 17 for the US), it was a banner year for North American indices. The Dow and S&P 500 were up 28.1 and 21.8 percent, while the Nasdaq jumped 28.2 percent. Volatility indices touched historical bottoms in both the US and Canada. The S&P set a new standard for the number of days without a 3 percent correction, eclipsing a mark set in 1996.
The commodity-heavy TSX surpassed 16,000 for the first time, up just over 6 percent at year end. All of this occurred in the face of three interest-rate hikes in the US and two in Canada. As Benj recently said on the CBC, “These are effectively the good old days.”
Farther afield, Austria’s market was up a whopping 55 percent, Poland’s by 52, and Denmark vaulted ahead by a decidedly un-rotten 32 percent. The road ahead for the EU is a rocky one, though, with the need to negotiate with the Brits, unwind quantitative easing and reduce government deficits, all while balancing the desire for unity with calls for self-determination.
In Asia, China nearly matched Austria with a 50 percent gain despite the country’s pressing debt issues. India jumped 37 percent, Japan 22, and financial hubs like Hong Kong and Singapore saw double-digit growth.
With the exception of Pakistan, Qatar and a few other frontier markets, there were very few losers and the MSCI World Equity Index added roughly 20 percent. These are the kind of numbers that make optimists blush.
Over the summer, the main investing themes were the acceleration of passive and ETF investing and the multiyear sprint in the FAANGs (Facebook, Apple, Amazon, Netflix and Google). These were all overshadowed, however, by the cryptocurrency craze.
The bitcoin story is mind-blowing. The pace and magnitude of price swings, the widespread public interest and the proliferation of copycat currencies make for a tale stranger than fiction. This get-rich-quick scenario rivals any historic example.
Of course, the risks are great, too — witness the recent sell-off — but in the longer run, look for cybercurrencies and blockchain technology to play important economic roles and to evolve in ways we can’t even imagine.
The greenback had a rough year and the shiny metal had its best since 2010, up 12 percent — the inverse correlation remains strong. Even so, one must wonder if bitcoin has stolen some of gold’s thunder. Copper surged 57 percent and silver by six percent.
North American natural gas was down and remains below $3.00, but WTI and Brent had excellent years, rising 11 and 17 percent respectively on renewed support from OPEC and Russia. Those two working in harmony? Will wonders never cease?
Here at Contra, the PP clocked in at 9.3 percent, by far its worst performance since 2008. Without the rise in the loonie, the return would have been 14.3 percent. The five- and 15-year numbers are now 22.5 and 16.7 percent. Just an observation: prior to 2000 and 2008, when markets took it on the chin, the PP didn’t do very well. Might that be a sell-off on the horizon?
Highlights included the comeback of Cathedral Energy, which was up 169 percent. The sales of BOCH, Magic and Iteris locked in comely gains of 350, 273 and 190 percent. On the other hand, GE’s Jeff Immelt fell on his sword — and impaled shareholders as well — while Innodata imploded, plunging 44.5 percent.
The VPP appreciated 11.6 percent during the year, also pared back from 16 percent because of the exchange rate. The five-year return is 13.5 percent.
Norsat became front-page news as Privet and Hytera engaged in a bidding war for the satellite equipment maker. Iteris tooled down the roadway with a handsome gain. CENX surged 129 percent and Guess? defied the Amazon bloodbath.
Unfortunately, Bellatrix, the VPP’s former darling, turned into a disaster and plunged 66 percent, and after flying high, Trinidad Drilling slumped back to Earth, leading to a second purchase for the VPP.
What to expect in 2018? Oh, to have the clarity of some pundits’ visions, wrong as they may prove to be. On the one hand, roaring markets make people want to invest more — oh, that dynamic greed. On the other, valuations are high, debt abounds on the personal, corporate and government levels, housing prices in Canada appear tipsy and car sales have posted new highs, suggesting the market for vehicles is nearly satiated.
Bond market activity can be an interesting predictor, and the spreads between two- and 10-year treasuries in the US and Canada have narrowed — often a harbinger of a slowing economy — and an inverse curve is a fairly reliable recession indicator. In the near term, the largest corporate tax cut in US history and the repatriation of hundreds of billions of dollars in profits from overseas should keep Wall Street in a giddy mood.
In Contra’s little world, minor changes are afoot. Ben has been scaling back somewhat but remains the glue that holds this outfit together. Phil has increased his role, including writing his first Year in Review. He has also launched a Contra Twitter feed (@ContratheHeard) and is moving back to Victoria.
Nova Scotian Bill MacGregor has been contributing to the quarterlies and providing his top-notch analytical insights. Mark and Lloyd remain as proficient as ever, and the bright-eyed Benj is writing regularly for The Globe and Mail while making appearances on BNN and the CBC. Contra’s voyage continues as it charts a course towards a silver anniversary.
The Contra Guys
Buys & Sells