It wasn’t a barnburner of a year like the one before it but nonetheless capital market returns for 2010 turned out to be quite respectable. Pretty much all of the equity market returns for the year were realized after Labour Day demonstrating once again the futility of forecasting short-term returns. If you recall, most analysts in late summer were forecasting an imminent market downturn.

Canadian REITs were once again the best performers returning about 22% in total returns. The TSX Composite was a close second returning 17.3% including dividends. Canadian Bonds had a positive year as well. The Canadian Dollar appreciated 5.6% against the US dollar and dragged down US equity returns for Canadian investors. The S&P 500 returned 8.73% in Canadian Dollar terms including dividends. MSCI EAFE and MSCI Emerging Market indices returned 1.79% and 12.50% respectively.

CAD/USD 5.66%
DEX Universe Bond Index 6.74%
DEX Short Term Bond Index 3.56%
DEX Real Return Bond Index 11.09%
Canadian REITs 21.92%

TSX 60 13.54%
TSX Composite 17.31%

S&P 500 (in CAD) 8.73%
MSCI EAFE (in CAD) 1.97%
MSCI Emerging Markets Index (in CAD) 12.50%

If you are interested in asset class returns for previous years, Norbert Schlenker of Libra Investments maintains a spreadsheet of total returns for various asset classes going back to 1970. Total returns for Canadian REITs were obtained from the monthly market statistics published by PWL Capital.

Unfortunately, investors who will be net buyers of stocks over the next decade will (or should) view the current level of the stock markets with some dismay. With the TSX Composite forecasted to post earnings of $830 in 2011, the earnings yield of the market is just 6.2% (compared to 10-year Govt. of Canada bonds yields of 3.2%). The S&P 500 trades at similar valuation levels — $94 in operating earnings for 2011 for an earnings yield of 7.5% compared to the 3.3% yield on 10-year Treasuries.

Sources: Bank of Canada, PC Bond Analytics, MSCI Barra and Standard & Poors.

This article has 13 comments

  1. I have been reluctant to buy for the last several months. The buyer in me wish for a real correction, instead we got a rally base on QE2 feeding more bubbles down the line. I’m holding more than 10% cash in my portfolio now, my asset allocation for cash is supposed to be 0%.

    Who was it that said the market can remain irrational longer than one can remain solvent?

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  3. This information depresses me because my portfolio, which is comprised entirely of ETFs and a five year GIC ladder, returned only 9% in 2010. I have all the usual suspects in my portfolio (XIC, VTI, VEA, VWO, XSB, XRE, etc) and my weightings are normal for someone in mid 30s. I’ll have to take a closer look. The only asset class I hold that was not mentioned was real return bonds, which comprise 8% of my portfolo. Maybe this explains the drag??

  4. @Slacker: New savings for me have been going into cash/short-term bonds as well. With markets rallying, that is helping keep the asset allocation in balance. I do wish for a market correction but unfortunately, the crystal balls remain cloudy as ever :)

    @DM: That’s about the returns I earned as well. I’m updating the Sleepy Portfolio numbers and that’s roughly what it earned during the year as well. The returns are dependent on one’s asset allocation. REITs and Canadian stocks did best, so those who have high allocations to these asset classes would have done well. Real Bonds didn’t do too badly (I forgot to add its returns). They gained 11.09%.

    I’d say 9% sounds about right for a globally diversified portfolio. Both US stocks and developed markets returned about 9%. Canadian stocks returned about 17% but bonds returned just 3%. So, 9% overall sounds about right.

    I don’t think this is distressing at all because globally diversified portfolios did not drop as much in value in the 2008-09 bear market. So, the portfolio recovery is somewhat muted as well.

  5. Welcome back from holidays CC!

    I beg to differ. Any of the so-called “technical” investors would point to the fact that on a seasonal basis, the “sell in May, go away” phenomenon holds true more often than not. And to “remember to be back in before November” or something like that also holds true more often than not. Macro-economic and the misguided hand of government occasionally messes things up, but in my investing life, it sometimes comes early and sometimes late, but that trend seems to happen nearly every year.

    With stock prices being a leading indicator of expectations often based on guidance, they tend to correct when companies miss on their earnings, or rally if they beat estimates. Hence the usual adjustments occur during each reporting period.

    It is difficult for me to judge the aggregate average of what every stock in the index is going to do, hence that is why I dislike indexing. I am and continue to be, a stock picker.

  6. Good call on the “Reit Bubble” in last year’s post Phil S. I’ll stick to index investing.

  7. @slacker: The ‘the market can remain irrational longer than one can remain solvent?’ quote was from Warren Buffett and it was part of his explanation for why he does not short sell.

    As you know, with short selling your upside is a maximum of the value of the stock you shortsell. However, your downside is theoretically unlimited as the stock rises toward the sky (as irrational as that may be for the stock price to do). So, for Warren, those odds are not very good. When you shortsell you are borrowing the stock from your broker and are faced with ever increasing cash calls as the stock price rises. When you buy long your maximum loss is the value of the stock you buy so it doesn’t really matter how long the market stays irrational and if the market is irrational on the upside for the stock you own, well then you are laughing all the way to the bank. In long situations, whether the stock goes up or down, you will always remain solvent assuming you could afford the stock you bought in the first place (or at least the interest on the loan if you took out a loan to buy it).

    I NEVER short sell. Although it can be tempting at times, the odds are just not good enough for me.

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  9. @Phil: It was nice to take time off and do absolutely nothing. But it’s tough to get back to normal :)

    I simply get earnings forecasts from sources such as S&P or TD or RBC recognizing that they could be completely off. But the same sources also provide earnings numbers for the previous years. For broad market indices, these numbers are usually (but not always) not that far apart. So, forward p/e is only slightly lower than trailing p/e (for most years).

    @Ottawa John: IIRC, REITs had two losing years in 2007 and 2008. Perhaps, this is just a bit of a bounce back. A lot of REITs are still way below their previous peaks. If I were to venture a guess, I’d say REITs are fairly valued now.

    @Sean: Agree. You got to admire short sellers. They are putting their money on the line and the markets could remain crazy for a long time. It’s a tough way to make a living but some seem to do it so well. It’s not a game I’m willing to play either.

    PS: I think that quote is from John Maynard Keynes.

  10. @Ottawa John. Don’t you worry – when the interest rates start to rise, the REITs will get squeezed. The strong will survive and the weak will get slaughtered.

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