I don’t want to be an alarmist but if oil prices are still below $60 a year from now, could history repeat itself during the next 18 months? Back in 1997-1998, the price of oil fell 60%, the US dollar surged 40% and Russia defaulted on its debt. A repeat experience would likely deliver a deadlier result to financial markets, as authorities have already pulled out all the stops in their attempts to fight the structural headwinds of high debt and unfavourable demographics. Determining the likelihood of this happening is virtually impossible since words from the powers of OPEC members in the Middle East have so far suggested they’re willing to use their balance sheets to maintain this game of attrition for as long as it takes. The negative scenario would create significant challenges to Canada’s housing market and economy in 2016, creating further downside in many staples of Canada’s financial markets.

On the flip side, if we finally see production shut-ins versus mere deferments of capital spend, and the Saudis assuage to the pressure of their cash starved peers, cut supply and allow the oil quote to breathe into the mid-$60 range, then asset markets could look very different by the Fall. Yields on developed country sovereign long bonds will have reversed a portion of their year-to-date 60 basis point (bps) move, sector rotation will be the flavour of the day in equities, and the Canadian dollar will have gained back several pennies of its 8.5% January plunge against the US dollar. It’s this degree of uncertainty that explains the attractiveness of low volatility, long/short equity funds...

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Well, 2014 turned out to be quite the year – oil got smoked, gold was flat, utility stocks and long term government bonds were among the best performing assets in North America and, once again, no Canadian team made it to the Stanley Cup finals! Going into 2014, consensus thinking had interest rates rising, the yield curve steepening and the market being geared for stock pickers, thanks to falling correlations between stocks. Stock correlations fell to less than 10% amongst the S&P 500 components by late 2014, the lowest level since January 2001, but correlations typically drop when volatility (lowest since 2006) is almost non-existent, since nothing moves. That fact along with being on the wrong side of the interest rate call explains why most fund managers picked the wrong stocks and underperformed their benchmarks this year...

The Fall of 2014 continues to be full of surprises for financial market participants, from the ‘flash-crash’ of U.S. 10-year sovereigns last month, the 47th record closing high experienced by the S&P 500 this month, and to oil now trading at less than US$65 per barrel as I write this commentary. Despite continued concerns about global growth and the potential for deflation, stocks and bonds offered decent gains in November, as talk of global stimulus and better than expected Q3 profit statements eased the minds of investors. The funds at Forge First had a great November...