The Canadian stock market could not get a good start to the 8th week of potential gains yesterday and the S&P/TSX Composite Index fell 1.6%. The index broke a 4 day rally, as fears of an international swine flu outbreak rattled commodity prices, dampening hopes for continued progress on the current economic recovery.
Resource or energy related stocks account for about 40% of the overall index and declined the most as worries that the already fragile world economy could be further damaged if a swine flu outbreak in Mexico turns out to be the start of a global pandemic. Flu fears may nag for some time but it is too soon to predict the impact on stock markets, which have been rising on improving investor sentiment of the global economy. The oil and gas sector dropped 2.4% as the price of crude fell more than 2% to slightly higher than $50 a barrel, partly because of worries the flu outbreak could cut back on air travel, lowering demand for jet fuel. The materials sector lost 2% even though gold is typically the safe haven.
The S&P/TSX composite index finished down 1.62% but it had fallen more than 2% shortly after market open (not unlike last Monday). Despite fears of a possible pandemic, the drop in the TSX was not seen as especially worrisome, given that the index had begun the session up nearly 26% over the past seven weeks (the biggest such gain since 1938 in stock markets – at least in the United States).
Financials continue to face headwinds as investors are nervous ahead of what a government stress test of major U.S. financial institutions might reveal in May. Worries that travel would be hit hard by flu fears put pressure on Canada’s airline stocks.
U.S. stocks also fell on the same concerns regarding the spreading of a new strain of flu that could dampen optimism about the economy, overshadowing a sweeping overhaul of General Motors and gains in biotechnology stocks (somebody always benefits).
Stocks dropped in value as governments around the world moved to contain the spread of a swine flu outbreak that has killed up to 149 people in Mexico and contain its spread to the United States and Canada. Anxiety about the flu hammered the entire transport sector and the Dow Jones Transportation Average dropped by 4.7% even as recent data has suggested the recession could be abating, and quarterly earnings have been less disappointing than Wall Street expected.
After Monday’s closing bell, S&P 500 stock futures added to losses in after hours trading as a flu expert from the World Health Organization confirmed the pandemic alert level had been raised to Phase 4 from Phase 3.
The Mexican situation is resurrecting fears of the negative impact that the SARS epidemic had on economic growth. The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5% drop in world gross domestic product (GDP).
In short, the stock market looks for things to worry about, particularly when you are up nearly 30% from the bottom in just 7 weeks.
The Dow Jones industrial average fell 0.64%, the Standard & Poor’s 500 Index fell 1.01% and the Nasdaq Composite Index fell 0.88%. The blue chip Dow average is up 22.6% from the current bear market closing low on March 9th, but remains down 8.6% for the year.
Investors did cheer GM shares which surged 20% to $2.04 after the troubled automaker announced a restructuring that investors hope will keep the company alive as it tries to secure government funding (although, equity investors might only end up owning 1% of the company and the bondholders only slightly more with the Union and the Government owning almost 85% of the company). General Motors offered its final plan to reorganize outside bankruptcy by slashing bond debt, cutting over 21,000 more U.S. jobs and emerging as a nationalized automaker under majority control by the U.S. government.
GM Chief Executive Fritz Henderson said the automaker would file for bankruptcy protection if an offer to exchange bonds for company equity failed to cut $27 billion in bond debt. Analysts doubted the debt exchange offer would succeed, setting up GM to restructure in Chapter 11.
GM’s bondholder’s blasted the terms of its debt exchange as a backroom deal designed to protect the interests of its major union, the United Auto Workers, a group that campaigned for President Barack Obama in last year’s election.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
