What a difference a couple of winning days makes in lifting investor optimism.
The Toronto Stock Exchange Index rose 1.67% yesterday, led by the heavily weighted financial sector, on hopes that the multibillion dollar stimulus package unveiled in Tuesday’s Canadian budget and further U.S. government action will promote economic stability in Canada and around the world.
The stock market saw the United States moving quickly to stabilize its ailing banking sector with the appointment of its new administration, which helped to boost U.S. stocks, especially the financial sector. U.S. lawmakers prepared to vote on a stimulus package to help the recession hit economy. U.S. stocks rose, building upon the S&P 500’s longest winning streak since November, as financial stocks soared on optimism the Obama administration was making progress on a plan to relieve banks of money losing assets (good bank and bad bank model that could acquire $2 trillion in so-called toxic assets from a variety of banks). Worries about the financial sector’s financial viability have been the biggest “hurdle” for the stock market, leading the negative sentiment and stock market losses in January, which is traditionally seen as a guide to the year’s prospects (or so the “January effect” theory goes). On recent “bets” that the government will “save the day”, the stock market has swiftly erased most of their recent declines.
Financial stocks stood out in the United States (Canadian banking stocks were up 4.7% as a group), with JPMorgan among the Dow’s top advancers with a gain of 10.4%, Bank of America gaining 14% and Citigroup gaining 18% (the S&P financial index gained 13%).
The Dow Jones industrial average gained 2.46%, the Standard & Poor’s 500 Index gained 3.36%, the Nasdaq Composite Index gained 3.55%.
Yesterday the Fed left rates unchanged at 0-0.25% and said to the markets that it was willing to buy Treasuries, agency debt and mortgage back securities if it deemed necessary to support the economy. Inflation is not a concern and the Fed cautioned against deflation without actually using the word.
U.S. Treasury Secretary Timothy Geithner said the department is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system. “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he told reporters in Washington. Geithner said the administration would move “relatively soon” to announce its strategy. “We are putting together what we hope will be a comprehensive plan for helping repair the financial system and bring recovery as a critical component to the president’s commitment to get growth going again and bring the economy back on track.” Under pressure from lawmakers and taxpayers, upset that the rescue plan shows few signs of lifting the economy (after injecting $350 billion), the Obama administration plans to overhaul the effort (how it plans to use the 2nd $350 billion).
In the current rescue efforts, the Treasury has taken ownership stakes in more than 300 banks as a condition of receiving aid. The government usually receives preferred shares and warrants, which can be converted into common stock and cashed out at the government’s request.
President Barack Obama scored his first major legislative victory yesterday with passage of an $825 billion economic stimulus package by a sharply divided U.S. House of Representatives (“the House of Congress”) on a 244 to 188 vote. Obama, who took office eight days ago, was denied, his goal of bipartisanship. Every Republican who voted opposed the landmark bill, complaining it contained too much new spending and not enough tax cuts. The Senate begins debate next week.
Obama, seeking to build support, said, “I hope that we can continue to strengthen this plan before it gets to my desk” to be signed into law, “but what we can’t do is drag our feet or allow the same partisan differences to get in our way.” Obama added that “we must move swiftly and boldly to put Americans back to work, and that is exactly what this plan begins to do.”
Take a look at the attached chart on U.S. unemployment rate with and without the plan each percentage point is about 1.3 million Americans.
Stocks this morning have given back some of yesterday’s gains based on some profit taking and additional details on the various stimulus plans – this recession will be a long one (we are already 15 months into it and it will take no less than 6 to 9 months to hit bottom according to many economists – the typical recession is over within 14 months and is frequently over before it is announced).
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
