Stocks slumped yesterday as a new “batch of bleak” economic data underscored the massive challenges facing the economy (and the new president). The drop on Wall Street is the biggest drop the day after a presidential election ever. This drop materialized the day after the biggest Election Day rally on record for Wall Street.
Selling hit across the board as U.S. markets dropped 5%. Canada faced half the causalities, and although overseas markets faired better yesterday, they quickly caught up this morning. Futures in the U.S. are pointing to a 1.4% drop at the open.
After markets closed yesterday, Cisco, the top maker of networking equipment (competes with Nortel), predicted the first revenue decline in five years because of the financial crisis. Cisco is considered the ‘bell weather’ or leading indicator for the technology sector and is closely watched by investors.
We are really seeing a lot of profit warnings as all companies in some manner have been impacted by the financial crisis. Oil fell yesterday more than 7% on signs of slowing gasoline demand after the U.S. Energy Department report showed an unexpected increase in gasoline inventories.
The economy is slowing and job cuts are materializing. A report from ADP Employer Services showed that private employers (non-government employers) made their deepest job cuts since the last recession in 2001 last month. The Institute for Supply Management (ISM) also said that the U.S. service sector contracted sharply in October (consumers are spending less).
Investors are also nervous in advance of tomorrow’s government data on October non-farm payrolls. Economists polled by Reuters have forecast a loss of 200,000 jobs in October.
This morning, The Bank of England unexpectedly cut the benchmark interest rate by 1.5% (yes that is 1.5%) to 3% the lowest since 1955 as they try to contain the damage caused by the credit crisis. The move was predicted by none of the 60 economists in a Bloomberg News survey.
This move is “staggering” and very impressive! The risks to inflation have shifted decisively to the downside when you see interest rate cuts of this magnitude. The European Central Bank has also cut interest rates by 0.50% this morning.
In short, credit markets are unthawing but don’t expect the days of ‘free lending’ to come back any time soon. The economy has basically stopped and is contracting; unemployment is going up while spending is going down. Things look a little bleak but central banks and governments are making huge steps forward in order to rebuild trust and confidence in the financial system. Stocks are also trading at 10 times earnings which is a very low valuation. We have not seen these valuations for a very long time.
Thinks will remain volatile. In the interim, stay diversified since the levels of ‘fear’ are still elevated and justifiable, but take comfort in the fact that things are not likely going to get worse in this very chaotic time.
Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV
SVP & Partner
