The Canadian stock market rose by 0.73% yesterday as higher oil prices and corporate earnings that beat investor expectations sparked renewed interest in equities (taking risk for higher returns) after 2 straight days of declines.
The price of oil, which is key driver to Canadian stock markets, rose above $51 a barrel on optimism that the U.S. recession is easing. Stocks got an additional lift in the afternoon as the U.S. Federal Reserve said the pace of deterioration in the economy appeared to be slowing. It said, however, it would continue to keep interest rates exceptionally low for an extended period after their regularly scheduled meeting.
Worries arising from swine flu eased a little as investors took a step back to await further developments in order to gauge the seriousness of the outbreak. Since the first cases were reported in Mexico last week, 160 people have died. The World Health Organization said the outbreak showed clear signs of spreading around the world. After the closing bell, a flu expert from the World Health Organization confirmed the pandemic alert level had been raised once again to Phase 5 from Phase 4 (the highest being Phase 6).
U.S. stocks climbed after grim growth data offered hints of future expansion, a prospect reinforced by the Federal Reserve’s hopeful comments (as mentioned). Gross Domestic Product dropped at a 6.1% annual rate in the 1st quarter, but (this is the silver lining) the data showed consumer spending rose and a decline in inventories suggested manufacturers and retailers will have to stock up on product (see below for additional details).
The Dow Jones industrial average gained 2.11%, the Standard & Poor’s 500 Index gained 2.16% and the Nasdaq Composite Index gained 2.28%. Before the Fed’s announcement, the S&P 500 broke through a significant resistance around the 875 level, a key technical point that the S&P had tried but failed to break in recent days. The 875 marked the highest level for the broad index in 3 ½ months. Certain investors believe a sustained move above that mark could lead to even more gains.
For the S&P 500, this was its highest finish since January 28th and was its highest close since February 9th, the day before U.S. Treasury Secretary Timothy Geithner put forth a bank rescue plan that disappointed investors with its lack of details (see my blog for additional details). The Nasdaq index is up 8.6% for the year, closed at its highest level since November 4th of 2008.
Yesterday marked the first 100 days since U.S. President Barack Obama took office. The S&P 500 is up 2.8% since his inauguration (but it has been very volatile).
President Barack Obama aims to announce today that Chrysler will be placed into Chapter 11 bankruptcy, leading to an alliance with Italian automaker Fiat. As part of negotiations, the U.S. Treasury raised its offer to Chrysler’s lenders to $2.25 billion in cash to forgive $6.9 billion in secured debt, two other people familiar with the matter said. The previous offer had been for $2 billion in cash.
Obama said he is “hopeful” that Chrysler will come up with a solution that will allow for a merger with Fiat. Details of a deal aren’t finished, Obama said in a White House news conference. If Chrysler has to go through a bankruptcy it will be a “quick” process, he said.
The Italian company would become a 20% owner of Chrysler, and a union retiree healthcare trust fund would hold 55%, with the rest of the company staying in the government’s hands initially.
Chrysler has made progress in its out-of-court restructuring, including reaching labor deals with the United Auto Workers union and Canadian Auto Workers on new contracts.
As mentioned, the GDP shrank by a larger than expected 6.1% annual decline within the 1st quarter, following a 6.3% decline in the 4th quarter of 2008. The recession has already cost the U.S. economy 5.1 million jobs, driving the unemployment rate to a 25-year high of 8.5% in March. Economists expect the jobless rate to rise further.
Still, some data have supported Fed Chairman Ben Bernanke’s mid-March suggestion that that some “green shoots” could be seen emerging even if only showing that the pace of contraction is slowing. For example, 1st time claims for unemployment aid have been running below the 261/2 year high touched in late March.
Similarly, while sales of previously owned homes fell in March, inventories of homes available for sale also fell. The Fed’s Beige Book of anecdotal reports from across the nation issued on April 15th said 5 of the U.S. central bank’s 12 districts saw the pace of decline in the economy slowing.
Even the report on 1st quarter GDP offered some hopeful signs. Consumer spending turned up and business inventories fell sharply, which could translate to future production of new goods or products.
The Fed announced it would buy $300 billion in long-term U.S. government debt and increase purchases of debt and securities issued by government-supported mortgage agencies by $850 billion in a bid to lower mortgage and other interest rates.
The recession is in its 16th month and next month is on track to become the longest since the Great Depression. The Federal Reserve, in a statement following the meeting, said the pace of deterioration in the economy appeared to be slowing and that the U.S. central bank would continue to keep interest rates exceptionally low for an extended period.
GDP, which measures total goods and services produced within U.S. borders, has now dropped for 3 straight quarters for the 1st time since the 1974-1975 recession. That downturn, which started in 1973, lasted 16 months.
Christina Romer, the head of the White House Council of Economic Advisers, told Reuters Financial Television the decline in inventories and a rise in consumer spending offered a silver lining in an otherwise bleak report.
In addition, consumer spending, which accounts for over 2/3rds of U.S. economic activity, rose 2.2% after collapsing in the 2nd half of 2008. Consumer spending was bolstered by a 9.4% jump in purchases of durable goods, the 1st advance after four quarters of decline.
Home building activity slid at a 38% rate, the biggest decline since the 2nd quarter of 1980. There are signs, however, that a big drop in construction activity is starting to slow and analysts expect this component to begin showing improvement in the quarters ahead.
Exports also declined by 30%, the biggest decline in 40-years. The Commerce Department said a $787 billion government package of spending and tax cuts, approved in February, had little impact on 1st quarter GDP.
In short, there is always something to worry about but there are also glimmers of hope and encouragement. The economy appears to be finding a floor and things are moving forward. There is still a long journey ahead but a journey with opportunity.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
