The S&P TSX Composite Index ended Friday little changed, but up just under a percent on the week, powered by financials, for its highest close of the year.
Both TD Bank and Royal Bank reported strong growth powered by wealth management, solid core business and, in the case of the former, strong exposure to a recovering U.S. financial sector.
The growth in RBC’s wealth management business signifies a couple of things for the company and the Canadian market in general. Now, RBC has been putting a big emphasis on wealth management for some time now, and recently this has paid off. In the most recent quarter, the division earned $278 million, up 25% year-over-year. One takeaway from this is that the company is now reaping the rewards of its investment in this business. Of course, a good deal of the growth also comes from rising stock markets – not only do clients’ portfolios grow, resulting in more fees, but rising markets also encourage people to plow more money into higher-fee equity funds.
The last point is one that could use a little more analysis – should investors be “plowing” their hard earned dollars back in at present as markets hit or approach all time highs.
While we are loathe making investment decisions based on market indicators (i.e. We will buy a great stock at a cheap price no matter what the broader market is telling us). Many market watchers have been scratching their heads over low readings in the VIX or Volatility Index.
The VIX, often called the market’s “fear index,” continued to drop ahead of the holiday weekend, briefly touching 11.46 in recent trading, its lowest intraday level since March 2013.
Market Bulls and Market Bears are at odds over what factors are driving ultra-low volatility and what it might portend for the markets. Bulls point out that the VIX is rightly at a multi-year low given that the S&P 500 is repeatedly carving out fresh all-time highs. The VIX measures the prices investors pay for options as insurance on S&P 500 stock portfolios. In the near term, one could point to lighter stock-trading volumes and the predictable lull in risk-taking that occurs before holiday weekends. People have less risk, so there’s little need to hedge that risk, they say.
Bears will argue that a low VIX reading demonstrates that investors have let their guard down, dropping demand for S&P 500 stock-portfolio insurance just when they may need it.
Broadly speaking, we think there is an element of “fear” that has left the market and in certain segments we have seen bubbles from. But we do not see a broad bubble – stocks generally are just not cheap. We are in a stock pickers market.
We again remain steadfast in our belief that quality over quantity remains key – stick to 8-12 quality small-cap and/or dividend producing stocks. Look for our 2014 Breakthrough/Turnaround Report out over the upcoming weeks.
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