When CMC Markets first opened its doors in Toronto, the Canada 60 share market was below 600 points, and a US dollar cost $1.17. Over the following 15 years, these markets experienced extraordinary swings, as historic and unprecedented developments drove the financial world.
The trends accelerated this year, and as 2020 draws to a close, CMC’s traders and investors may take a moment to reflect on some of the major events and key changes.
Over the past one-and-a-half decades, there were two major global crises. Canadian stock investors saw significant falls in portfolio values over the global financial crisis (GFC) of 2008 and due to Covid-19 in March this year. However, these events differed significantly. The GFC wiped 50% off the value of the Canada 60 and took 17 months to unfold. The Covid-19 crisis was more savage, taking just one month to push the stock market 36% lower.
CMC’s customers took two important lessons from these sharp market sell downturns. The first is that while higher market volatility worriers investors, it is good news for traders, who can garner faster profits from smaller trading positions, albeit at higher potential risk. The second is that CFDs, when used in conjunction with other investments, can lower overall market exposure. Investors who hedged their stock portfolios with short index CFD positions fared much better during these market storms.
And of course, there were many good years for Canadian investors and traders. Action from the Bank of Canada, as well as central banks around the world, supported stocks and bonds and played a significant role in lifting market returns. Lower interest rates and high liquidity were key factors in the Canada 60 hitting its all-time high near 1,070 in February, and meant the index’s superior dividend yield was an important contributor to portfolio performance.
The composition of the leading stock market indicators has evolved over time. Information technology shares have increased in importance since 2005, just as they have in Canada’s neighbour to the south. Information technology stocks now represent around 12% of the value of the Canada 60. However, the key sectors remain the same. Banks and financial stocks comprise around one-third of the index value, and materials and energy stocks make up another quarter.
The Toronto Stock Exchange is still composed of the most significant listings of mining and drilling stocks around the world. This means commodities are a very important part of the Canadian financial landscape. Fluctuations in the price of gold, crude oil, and copper play a crucial role in the fortunes of Canadian investors, and CMC Canada’s clients are over-represented globally in the trading of these commodities.
The higher affinity with commodities is also a major contributor to movement in the Canadian dollar. The loonie is considered a “high beta” currency, along with other commodity currencies like the Norwegian kroner and the Australian dollar. When the global growth outlook improved, these currencies moved higher faster as demand for the industrial inputs these countries produce increased. The reverse is also true. When worries emerged, the pressure on high beta currencies often sees them drop sharply.
There are many other factors that affected the movement of the Canadian dollar. Surprisingly, and contrary to what local and international politicians say, government policies are rarely a major influence. Instead, interest rate differentials and international trade and capital flow better explain the swings in the USD/CAD exchange rate between 0.90 and 1.47 over the last 15 years.
At the moment, the world is in the midst of the greatest economic experiment ever attempted. The historically high levels of coordinated central bank and government support represent an extreme in financial conditions. No one can say how or when this situation will be resolved. However, Canada’s diverse and robust people, geography and institutions mean it's well placed to face whatever may come from the global financial markets. At CMC Markets, we’re looking forward to the next 15 years.
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