Big Surprises For Canadian, US Markets

07/23/2007 12:00 am EST

Focus: MARKETS

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, publisher of Internet Wealth Builder, identifies five trends that have defied the predictions of market gurus this year-often, it turns out, with happy results.

Many of the fearless forecasts made last New Year's have turned out to be way off the mark. Here are my nominations for the top five surprises so far in 2007.

Income trusts. After [Canadian] Finance Minister Jim Flaherty dropped his Halloween bomb, [which phased out favorable tax treatment for income trusts], the trust market went into freefall, at one point losing more than $30 billion on paper.

As it turns out, although trusts are doomed they aren't just folding their tents and slipping silently away. Nor are investors ready to let go of them, even though we all know what's coming in 2011.

Even more surprising was the speed at which takeover mania took hold. The buyout binge is still going on; within the past couple of weeks we've seen two major transactions. There are undoubtedly many more such deals in the works.

Canadian stocks. The Toronto Stock Exchange (TSX) started the year on a dismal note. Expert opinion was mixed on where the market was heading but the prevailing view (which I shared) was that caution was in order. After all, the bull market had been going for more than four years. The good times never roll forever.

To their credit, Internet Wealth Builder contributing editors Irwin Michael, Tom Slee, and Yola Edwards all were bullish on 2007. Last week, Jeff Rubin of CIBC predicted the TSX will hit 15,000 by the end of the year and provide investors with a total return of 18.1% for 2007.  (It closed a little below 14,600 Friday-Editor.)

Tech stocks. The big surprise has been the resurgence of the high-tech sector. After the dot-com debacle, tech stocks were moribund for several years as the NASDAQ Composite index limped along at around the 2,000 level until the late summer of 2006. It then began a strong rally that has taken the index to over 2,660. The six-month gain to the end of June was 7.8%, beating the Dow Jones Industrial Average by 0.2%. Tech could well be the hot story of the second half of the year.

Interest rates. In January, the feeling was that interest rates would turn down. In its January statement, the Bank of Canada projected that the annualized GDP rate would pick up to about 2.5% in the first half of the year and that total CPI inflation would average just over 1% during 2007.

Six months later we're looking at the likelihood of a quarter-point increase, with more to come later in the summer. Bond prices have been pummeled and about the only people who are happy are fixed-income investors who keep their money in T-bills and guaranteed investment contracts (GICs).

The loonie. At the start of 2007, the Canadian dollar was still dropping from its high of US91c, reached in June 2006. It got as low as US 84.37c on Feb. 8. On Friday, our dollar surged through US95c and the prospect of parity by year-end no longer seems far-fetched. There are several reasons for the loonie's turnaround, including a rebound in oil prices, a stronger-than-expected Canadian economy, the prospect of rising interest rates, and the ongoing weakness of the US greenback. Further advances in the loonie appear likely.

Those are a lot of surprises in just six months. It would be nice if the second half of the year was a little more tranquil, but that's probably wishful thinking.

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