The year is half over and you can't say it hasn't been interesting. In some ways, 2013 is unfolding pretty much as expected back in January. But there have been a number of surprises, both good and bad. I'll look at those in a moment but let's being by reviewing the numbers for the first six months.
Despite Friday's rally, the TSX ended the first half in negative territory, down 2.4%. Our market was dragged down primarily by the poor performance of the resource sector. Gold stocks were hammered, losing about 44%, while base metals were also hit. Since resources represent such a large segment of the TSX, even strong performances by consumer discretionary stocks (+20.7%) and consumer staples (+14%) couldn't make up the difference.
By contrast, all the major U.S. indexes posted double-digit gains led by the Dow which was up 13.8%.
Overseas, Japan's Nikkei Index finished the first half with a gain of 31.6%, making it the leader among developed markets by a wide margin. Major European indexes posted modest gains while China was down significantly.
Now let's look at the big surprises of the year so far, both positive and negative.
Good surprises
The U.S. recovery. The revised first-quarter numbers weren't as strong as originally projected but despite that it is clear that the American turnaround is starting to take hold. The housing sector, a key indicator, is gaining momentum, unemployment is slowly edging down, and consumer spending, while not strong, did not collapse in the aftermath of payroll tax increases.
So far, Congress has avoided seriously messing things up although the fractious Republicans and Democrats have the potential to do so at any time. The Federal Reserve Board, while still cautious, is sounding more upbeat lately to the point where Chairman Ben Bernanke is suggesting it may be possible to reduce the quantitative easing program in the fall. The stock markets didn't like that idea but all the major U.S. indexes still managed double-digit gains in the first half. So far, so good.
Europe. We haven't heard much about the eurozone crisis this year, which in itself is a good sign. It hasn't gone away but at least there is no longer a feeling of impending disaster in the air. Europe's bureaucrats have even admitted they bungled the Greek bailout with an overdose of austerity, which should bode well for a more realistic and humane approach in the future. The major European stock markets are all in positive territory for the year, albeit with very modest gains.
Japan. Abenomics, as the new stimulus policies of Prime Minister Shinzo Abe, has certainly caught the world's attention. At one point, Tokyo's Nikkei Index was ahead more than 40% for the year on hopes that Japan has finally turned its back on decades of economic stagnation. Lately, economists and investors have become more sceptical about the long-term prospects for the success of Abenomics and the Nikkei experienced a 4.4% drop in June. Despite that, it's still ahead more than 30% for 2013 and up over 50% year-over-year.
Bad surprises
Gold. Only die-hard gold bugs expected the precious metal to surge in 2013 but no one that I'm aware of predicted the price would collapse to the degree it has. Gold finished 2012 at US$1,675.80 and I wrote at the time that I expected an increase in the 5% to 10% range this year. Instead, gold has tanked and is now struggling to stay above US$1,200. There have been many theories advanced for why this has happened but the most plausible one is that with a recovery taking hold and inflation not an immediate concern, investors feel there is more profit potential in the stock market than in holding bullion.
The TSX. The Toronto Stock Exchange finished the first half of 2013 in the red, due in part to the horrendous performance of the gold sub-index which lost almost 44% in the first six months. Add to that big losses in the base metals and mining sectors and there's no way the TSX could operate in the black. In fact, we should consider ourselves fortunate that the first-half loss was only 2.4%. Still, among the developed countries no one fared worse - even Australia outperformed us.
China. Everyone was hoping for a soft landing in China and the new leadership in Beijing is certainly doing its best to achieve that. But economic growth continues to slow, exports are lagging, and there are troubles in the banking system. The result was a big sell-off in Chinese stocks in June with the Shanghai Composite down 14.7% and Hong Kong's Hang Seng Index off 9.3% for the month. As a result, both are in negative territory for 2013.
Bonds. Everyone knew that when interest rates started to rise, bonds would take a hit. But no one expected it to come so quickly and dramatically. Nor did anyone predict the collateral damage: the big drop in interest-sensitive securities from utilities stocks to REITs.
There are sure to be more surprises in the second half of 2013. Let's hope that most of them fall into the "good" category.
