Markets rallied in February, but correction still looms

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Well, that's more like it! After a wobbly start to the year, most world stock markets rallied in February to post some very respectable gains.

In New York, where all the major indexes were down in January, we saw a complete reversal of fortune, led by the tech-heavy Nasdaq Composite which finished the month with an advance of 5 per cent. That brought it back into the black for 2014 with a year-to-date advance of 3.1 per cent.

The S&P 500 added 4.3 per cent during the month and it's now showing a modest advance of 0.6 per cent for 2014. Only the Dow is still in the red. It gained 4 per cent in February but that wasn't enough to overcome the January losses and it is down 1.5 per cent year-to-date.

Overseas, we saw some decent gains in the major European markets as economic news from the euro zone improved. France's CAC 40 index picked up 5.8 per cent, enough to pull it to the positive side of the ledger with a year-to-date gain of 2.6 per cent. The U.K. Dow was up 4.8 per cent (1.3 per cent for the year) while the German Dow added 3.7 per cent to edge into positive territory for 2014 at 1 per cent.

However, Tokyo, last year's hottest market, continued to struggle. The Nikkei lost ground for the second month in a row, dropping 0.5 per cent. For the year, it has now lost 8.9 per cent. Latin American markets were also weak with Mexico's Balsa index falling 4.8 per cent for a year-to-date loss of 8.9 per cent while Brazil's Bovespa fell 0.1 per cent bringing the decline for 2014 to 7.6 per cent.

One of the big surprises is our own S&P/TSX Composite Index, which gained 3.8 per cent in February to give us a year-to-date return of 4.3 per cent. I said in my forecast at the start of the year that there was a possibility Toronto would outperform New York in 2014 and so far that's panning out, although it is of course still very early.

The TSX performance has been led by a big rebound in the price of gold stocks, which were badly beaten up last year. The S&P/TSX Global Gold Index, which is mainly composed of Canadian companies, was ahead by 8.8 per cent in February and now stands with a year-to-date gain of 26.8 per cent.

The small information technology sector has also been strong, thanks in large part to the recovery in BlackBerry shares. The sub-index was up 3.3 per cent for the month and now stands at +11.7 per cent for the year.

It's nice to see the stock market rally after a rough January but don't get too complacent. The economic recovery is still very fragile. I know I'm starting to sound like a broken record but we're overdue for a significant correction and it would not surprise me if it came this month. Share prices in New York look expensive. Toronto isn't as bad but if Wall Street stages a retreat, we'll get dragged along. So consider taking some profits where appropriate and holding some cash in reserve. At some point, the stock market will have a sale and you'll want to be ready.