We're half way through 2012 and if you want to take a "glass is half full" view, the good news is we have not yet had a train wreck.
Despite Friday's impressive rally, markets were volatile for the first half and the news has been disconcerting. For the moment, Europe once again appears to have pulled back from the brink of a eurozone break-up following last week's summit meeting which provided greater protection for the banking sector and took another step towards fiscal integration. But there is still a lot to be done and it remains to be seen whether European leaders have the stomach for some of the tough decisions that are still coming.
In the U.S., economic growth, sluggish to begin with, threatens to decline to near-zero in the second half while Washington remains impotent to act. Meantime, high-growth economies like China and Brazil are slowing while India looks poised to go into reverse. Not surprisingly, hot money has continued to pour in to U.S. Treasuries and Swiss francs as international investors seek safety.
Against this backdrop, it's a wonder that the markets have held up as well as they have so far. In fact, many of them are actually in the black year-to-date.
I said at the start of the year that I expected the U.S. to outperform Canada in 2012 and that's exactly what we have seen so far. The S&P 500 was ahead 8.3% as of the close of trading on June 29, boosted by Friday's rebound. The Dow was up 5.4% but the big surprise was Nasdaq, which posted a 12.7% gain on strength in the information technology sector.
Unfortunately, Canada's information technology stocks, dominated by troubled Research in Motion (RIMM), helped pull the S&P/TSX Composite Index in the opposite direction. Led down by commodities, the index finished the first half of the year down 3%. Mining stocks were the biggest losers with the S&P/TSX Capped Metals and Mining Index falling 19.6%. Healthcare stocks did best, gaining 19.5%, but this is a very small sector with only four listed companies. Among the major sectors, consumer discretionary stocks did best adding 11.6%. We have several stocks from this category on our Recommended List including Dollarama and Tim Hortons, both of which have done very well.
Surprisingly, the best performing overseas index was India's NSE 50 which ended the half up 14.2%, despite all the media attention given to the country's economic woes. Hong Kong turned in a 5.5% advance as investors seemed to shake off concerns about a hard landing in China. Japan's Nikkei Index did even better, gaining 6.5%.
Some European exchanges also surprised. The German Dow added 5.4% in the first half - a lot better than might have been expected given the turbulence on that continent. The worst performer was Spain, whose key index lost 17.1%. However, that was a big improvement over where it had been before a 5.7% rally on Friday.
The two big Latin American markets went in different directions. In Brazil, the Bovespa was down 7.2% but Mexico's Bolsa added 6.9%.
Bonds outperformed the TSX during the first half, contrary to what had been expected back in January. As of the close of trading on Thursday, the DEX Universe Bond Index was ahead 2.3% for the year. Corporate bonds continue to outperform government issues by a wide margin: the DEX Universe All Government Bond Index was up 1.89% in the first half while the DEX Universe All Corporate Bond Index added 3.45%.
So what are we likely to see in the second half? Given the weak outlook for 2013, I will be surprised if the stock markets perform as well as in the first six months of the year. If all the signs are right, the economic storms that we experienced in the first half will intensify in the coming months. The long-running European crisis has to come to a head at some point and lancing the boil will be painful for everyone.
There is one intriguing possibility. If Mitt Romney wins the presidential election in November, we could see a huge year-end rally. Unfortunately for President Obama, he has been carrying the can for America's economic woes, even though they were largely the result of bad policies from previous administrations, most notably that of George W. Bush. Mr. Obama's efforts to pull the U.S. out of its funk have not succeeded or have been stymied by Congress, causing many Americans to lose confidence in him.
This is not to suggest that Mr. Romney has a magic wand or will be any more successful. However, a change at the top could bring renewed confidence to an American public desperate for hope and, by extension, to the markets. Certainly a Romney administration would be in a better position to work with what is likely to be a Republican-dominated Congress than an Obama one would be. That in turn would buoy the markets and fuel the traditional year-end Santa Claus rally.
We'll see how it all plays out.