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Weekly Trends

Andy MacLean, CFA - Private Client Strategist April 10, 2014

Rotation Continues as Key Theme


Yesterdays release of the minutes from the March 18-19 FOMC meeting revealed a Fed with a decidedly dovish policy leaning. This seems to be in contrast to Yellens comments following the March meeting where she stated that rate hikes by the Fed could come sooner than previously expected as the Fed had moved their median rate forecast higher. Specifically, Yellen indicated that rate hikes could come as soon as 6 months after the end of QE which would put the timeline for a tightening move by the Fed sometime in the second quarter of 2015. Widely held expectations were that the Fed was not going to move before the end of 2015. What the minutes revealed was a complete absence of a timeline for rate hikes suggesting that Yellen misspoke during the press conference following the March meeting. In fact the minutes showed policymakers feared markets could misread the shift in median rate forecast and that members of the FOMC didn't believe the forecast shift represented a move to a less accommodative stance. Several wanted to include a statement that even after thresholds hit (i.e. a 6.5% unemployment rate), rates could remain low for an extended time. Policymakers also wanted to add "additional guidance" in a post FOMC statement to further clarify FOMC future policy intentions. Given the poor job that the Fed has done in providing off -thecuff guidance in the past (Bernankes comments last year related to the taper and Yellens most recent comments) this is something they should consider. For much of the history of the Fed the policy has been to provide no, or very little, guidance regarding intentions on the view that their comments can have unintended consequences on markets given the lack of knowledge on market positioning. Bottom line is that the Fed is likely to remain accommodative for an extended period. We should not expect rate increases until the end of 2015 unless the economy strengths more than expected or inflation accelerates well beyond 2%. Given the still apparent slack in the economy this appears unlikely. As well, the Fed is likely to become very cautious in providing guidance. First quarter 2014 earnings season kicked off this week. Expectations are that earnings growth will come in at a fairly healthy clip of 12% (year-over-year) on a 5% expansion in sales. While this winters adverse weather could make those expectations difficult to achieve, this earnings season should still be one of the better ones in recent memory. Earnings for the remainder of the year should remain strong with an acceleration to 14% growth by the first quarter of next year. Fears of a change in Fed policy together the adverse effects of weather have led to a rotation in the market for much of this year. Momentum has returned to the traditional safe sectors such as Utilities, Telecos, and Consumer Staples while prior high-flyers like Technology, Industrials, and Consumer Discretionary have lagged. More recently we saw a fairly sharp correction in select sectors such as Biotechnology and Technology (especially social media) as valuations became extended.

Equity Markets
18,000 S&P/ TSX Index 17,000 16,000 15,000 14,000 Dow Jones Industrials

13,000
12,000 11,000 10,000 9,000 Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 Jan-2014

Canadian Market Performance


Utilities Telecom Energy Materials Financials Cons. Disc Cons. Stap Info. Tech Industrials Health Care S&P/TSX Small Cap S&P/TSX Completion S&P/TSX Comp. -15 -10 -5 0 5 10 5 Day 1 Month

Market Valuations
35 S&P 500 P/E Ratio
30 25 S&P/TSX P/E Ratio

20
15 10 5 2001

2003

2005

2007

2009

2011

2013

Source: Bloomberg, Raymond James Ltd.

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Weekly Trends

April 10, 2014 | Page 2 of 4

We view this rotation into safe-haven type stocks of the past several months as a short term reaction to extended valuations in select technology and biotech stocks together with some overall concerns regarding the pace of growth. As these concerns subside we expect that investors will begin to rotate back into growth focused equities. For a more permanent rotation to occur (back into safe-haven stocks) we note that from a historical perspective, at least, that tends to transpire near the end of an economic cyclical rather than the mid-point where we feel we are currently. As the cycle becomes extended with rising interest rates and declining profitability investors tend to gravitate towards those stocks with very high earnings visibility and relatively low valuations. At the same time the yield curve becomes flatter, credit spreads widen, excess liquidity dries up, financial conditions tighten, and overall market profitability begins to wane. Simply put those conditions are not currently in place. The yield curve continues to steepen, credit spreads are narrowing, excess liquidity (while less abundant than previously) is still favourable, financial conditions remain attractive, and profit growth is still strong. Additionally we note that overall valuations are not yet excessive and central banks remain very accommodative. From a macro perspective then this is still an environment that favours cyclical stocks, especially those with strong growth characteristics. At this stage of the cycle many of those investments can still be found in the Technology, Industrial, and Consumer Cyclical sectors. Corrections, even in bull markets, occur from time to time. They serve to work off some of the valuation excesses, undue investor optimism, and overbought conditions. Occasionally rotations, especially when they result in movements out of growth stocks, can serve the same purpose. Its been almost two years since weve seen any material pullback in the market. From a historical perspective this has been rather extended so it could be argued that a correction is overdue. But given that the underlying fundamentals of this bull market are still intact we would expect any pull back to be brief.

Rotation Favouring Utilities and Telcos Industrials, Tech, and Consumer Staples Lagging

Source: Bloomberg, Raymond James Ltd.

Weekly Trends

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Guided Portfolio Stocks


Name Consumer Discretionary Canadian Tire Corp-Class A Cineplex Inc Corus Entertainment Inc-B Sh Delphi Automotive Plc Dr Horton Inc Linamar Corp Toyota Motor Corp -Spon Adr Consumer Staples Bunge Ltd Loblaw Companies Ltd North West Co Inc/The Wal-Mart Stores Inc Energy Altagas Ltd Whitecap Resources Inc Canadian Natural Resources Cenovus Energy Inc Crescent Point Energy Corp Enbridge Inc Inter Pipeline Ltd Suncor Energy Inc Vermilion Energy Inc Financials Aflac Inc Bank Of America Corp Bank Of Nova Scotia Biomed Realty Trust Inc Bnp Paribas-Adr Can Apartment Prop Real Esta Ci Financial Corp Intact Financial Corp Manulife Financial Corp Royal Bank Of Canada Sun Life Financial Inc Toronto-Dominion Bank Health Care Eli Lilly & Co Gilead Sciences Inc Industrials Black Diamond Group Ltd Bombardier Inc-B Cummins Inc General Electric Co Information Technology Apple Inc Linear Technology Corp Nxp Semiconductors Nv Open Text Corp Qualcomm Inc Materials Agrium Inc Basf Se-Spon Adr Cameco Corp Detour Gold Corp First Quantum Minerals Ltd Yamana Gold Inc Telecommunication Services Bce Inc Telus Corp Utilities Algonquin Power & Utilities Fortis Inc Ticker CTC/A CGX CJR/B DLPH DHI LNR TM BG L NWC WMT ALA WCP CNQ CVE CPG ENB IPL SU VET AFL BAC BNS BMR BNPQY CAR-U CIX IFC MFC RY SLF TD LLY GILD BDI BBD/B CMI GE AAPL LLTC NXPI OTC QCOM AGU BASFY CCO DGC FM YRI BCE T AQN FTS Last Price $106.96 $41.60 $23.91 $66.63 $21.83 $53.02 $103.44 $79.32 $46.04 $24.84 $76.79 $46.40 $13.06 $43.75 $31.62 $41.38 $51.17 $28.71 $39.43 $69.03 $61.85 $16.15 $64.20 $20.28 $38.55 $21.11 $35.25 $68.66 $20.32 $72.87 $36.54 $51.14 $58.67 $65.81 $34.11 $4.01 $144.17 $25.61 $523.90 $47.93 $57.43 $49.69 $77.97 $101.05 $109.29 $25.34 $10.59 $19.89 $9.46 $48.12 $38.16 $7.63 $32.01 Crncy CAD CAD CAD USD USD CAD USD USD CAD CAD USD CAD CAD CAD CAD CAD CAD CAD CAD CAD USD USD CAD USD USD CAD CAD CAD CAD CAD CAD CAD USD USD CAD CAD USD USD USD USD USD CAD USD CAD USD CAD CAD CAD CAD CAD CAD CAD CAD PE Ratio 15.5 30.5 13.5 15.2 13.9 16.0 Canadian Dividend Dividend Yield + Plus 1.3 3.4 4.3 1.0 0.2 0.6 1.5 2.0 6.8 2.4 3.2 2.3 1.3 3.1 6.7 2.5 4.1 1.9 3.5 2.3 0.2 3.8 4.7 5.4 3.0 2.6 2.6 3.6 3.9 3.3 3.3 0.0 2.4 2.8 1.6 3.1 2.3 1.6 0.0 1.0 1.7 2.7 1.6 0.0 1.6 3.0 4.8 3.6 4.4 3.9 Guided Portfolios Canadian Growth Global Equity

20.7 18.8 15.8 30.3 48.1 20.6 24.7 72.5 94.2 12.6 25.0 10.0 10.6 12.5 101.3 7.3 8.2 23.5 19.0 13.5 12.9 11.4 13.5 13.3 35.1 26.8 12.2 18.8 15.5 13.0 26.9 30.9 32.3 19.9 12.9 30.9 138.3 19.2 54.1 16.3 17.8 28.3 20.2

Source: Bloomberg, Raymond James Ltd.

Weekly Trends

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Important Investor Disclosures


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