By Ken W. Wilk, Portfolio Manager and Investment Advisor, TD Waterhouse Private Investment Advice*

Financial markets continue to express unease about the strength and viability of the economic recovery.  The U.S. is moving towards slower growth.  In Canada, the economic recovery has tapered off, but remains on track albeit at a slower pace. 

Rate of Return 1 Month 6 Month 1 Year
S&P/TSX Composite Index -3.98% -3.85% 8.86%
S&P 500  Index -5.39% -7.57% 12.12%
5 year Canada bonds – yield as of June 30, 2010 is 3.65%

Market Commentary – Q2 2010 

At the onset of the recovery, many economists were caught off guard by the strength of growth as exports improved, stimulus measures kicked in and firms restocked depleted inventories. Admittedly, even our own forecasts were too pessimistic about the recovery’s initial strength.  Against this backdrop, corporate profits rose and stocks posted an impressive rebound.  We did however never switch our fundamental story that high levels of indebtedness in the public and private sector combined with continued stress in financial markets would hold growth to a tepid rate for the foreseeable future. 

With this in mind, it appears that we may have reached a point, where the initial surprise boost in growth has slowed and we are now gliding towards the more subdued growth trajectory that we had anticipated. This does not mean that the recovery has been undermined. 

Now that the initial boost in activity brought on by stimulus measures and cyclical manufacturing has eased, we are facing a period of sluggish growth as the economy works through a number of structural adjustments. 

We continue to recommend large cap, good quality (low leverage) high dividend paying stocks, particularly for taxable investors.  We favour those that also offer the potential of increasing dividends down the road.  In the last quarter, numerous companies in both Canada and the U.S. have raised their dividends.  Expect total returns to be more balanced between capital gains and income going forward. 

Fixed Income Q2 2010 Outlook 

Search for yield is the predominant investment refrain.  While the secular decline in interest rates may be over and rates will begin a slow steady climb up, yields are still low on an absolute basis.  For investors who need income, this is a real problem.   We believe monetary policy tightening in the U.S. is likely delayed due to (1) the problems in Europe which will result in slower growth; (2) higher rates in the U.S. will only exacerbate the strength of the U.S. dollar versus the euro, and (3) there is still the possibility that the global recovery stalls. 

Once again I must stress that the main purposes of bond investments are to provide capital preservation and absolute returns, and that income is as important as capital gains.  In a still abnormal low-interest rate environment, we will strive for risk management over chasing reward and discipline over conviction.  The Canadian dollar is still expected to trade above parity against the U.S. dollar for the first half of 2010, before drifting back below parity through 2011. 

In conclusion the market environment remains unstable and vulnerable to shocks.  Risk tolerance is low and investors have had their confidence shaken by recent events.  But all is not gloomy.  Employment in the U.S. is picking up.  Corporate earnings results have been great.  With interest rates low, economic growth moderate and equity market valuations neutral, equities can outperform.  We will stick with quality. 

Should you have any questions, please do not hesitate to call. 

Sincerely, 

Ken W. Wilk

Portfolio Manager and Investment Advisor

T (204) 988-5221 F (204) 988-5236 Toll free 1-866-988-5221

[email protected] 

* Comments summarized from 1) TD Waterhouse Bottom Line July 2, 2010 and 2) TD Waterhouse Monthly Perspectives June . 

TD Waterhouse Private Investment Advice is a division of TD Waterhouse Canada Inc, a subsidiary of the The Toronto-Dominion Bank and a licensed user of The Toronto-Dominion Bank trade-marks.  TD Waterhouse Canada Inc – Member CIPF.

Trade-mark of The Toronto-Dominion Bank.  TD Waterhouse Canada Inc. is a licensed user. 

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