Canada’s main stock index closed lower yesterday despite a solid start to the day as investors continued to ‘book profits’ from the indices remarkable 40% rally from the 5-year low it hit on March 9th. Current valuations are on the high-end of range and currently investors believe that contraction in economic activity will be substantially less in the 3rd and 4th quarter of this year.
Energy companies led the TSX index’s selloff, its 3rd straight, as concerns about the strength of the economic recovery sent oil prices down further from the near 8 month high above $73 a barrel they reached last week. The sector was down 2.4%.
The S&P/TSX Composite Index rallied at the open, rising 1.6%, before steadily declining and posting it’s lowest close since June 3rd. At this time investors are not concerned. It was just last week that the TSX had rallied to 10,726.01, which was 43% above the low recent low. Yesterday, the index closed down 87.38 points, or 0.84% to close at 10,307.40.
In the United States stocks slipped as mixed economic data and Best Buy’s disappointing sales spurred worries about a lackluster economic recovery. After a 3 month stock market advance that lifted the S&P 500 as much as 40% from 12 year lows, analysts said the economy needs to start showing real improvement to support optimism about an upcoming economic recovery.
A rebound in May housing starts pointed to some stabilization in that sector (see below for more information), but another government report showed industrial production had a steeper than expected slide last month. Industrial production fell 1.1% in May, while capacity utilization, a measure of slack in the U.S. economy, slumped to its lowest level on records dating back to 1967.
The Dow Jones industrial average fell 1.25%, the Standard & Poor’s 500 Index fell 1.27% and the Nasdaq Composite Index fell 1.11%. The S&P 500 is still up 34.8% from the March low. Any declines have been nominal in nature, but analysts are increasingly looking for a larger pullback. A stock market correct is a pull back of 10% or more and a bear market is a 20% correction.
Wholesale prices were muted despite higher gasoline costs. Prices compared with a year ago notched their steepest falls since 1949, which should help to ease market fears that inflation could soon be stalking the economy.
Housing which is at the “heart” of the greatest recession since the Great Depression needs to recover in order to ensure economic recovery. The Commerce Department said housing starts jumped 17.2%, the biggest rise in 3 months, to an annual rate of 532,000 units. Encouraging news for the housing sector, is that single family starts rose 7.5%, the largest gain since January 2006.
New building permits, which give a sense of future home construction, rose 4.0% which is the biggest gain since June 2008, to 518,000 units in May. However, the housing market will still be hampered by higher mortgage rates since government debt has seen their yields rise (although, these yields are dropping) and excess inventory. In short, we could still see further price deterioration in the short-term as there is more supply then demand.
President Barack Obama will formally unveil the proposals today on financial reform. Obama pledged earlier yesterday in remarks at the White House that he would pursue major changes in financial oversight, but warned it will be a “heavy lift” politically with special interests already offering opposition.
A key element in the plan will be creating an independent Consumer Financial Protection Agency to write and enforce rules on fair lending and other matters. The administration wants to accomplish a wide range of changes in regulation to try to prevent a recurrence of the crisis.
The administration wants to give the Federal Reserve new powers to police “systemic risk,” in conjunction with a council of regulators, as a way to make sure that the failure of one important company does not destabilize the broader economy (in short, rein in the derivatives).
“We are going to put forward a very strong set of regulatory measures … We expect that Congress will work swiftly to get these laws in place,” Obama said. “But it is going to be as usual, a heavy lift … You’ll hear a lot of chatter about ‘We don’t need more regulation’ and ‘government needs to get off our backs,’” he added. “There is a short memory unfortunately and I think that’s what some of the special interests and lobbyists are going to be counting on, that somehow we’ve forgotten the disaster that arose out of their reckless behavior. And I’m going to keep on reminding them so we make sure that we get something in place that prevents this kind of situation from happening again.”
A top Federal Reserve official warned yesterday not to take recent gains in stocks as proof the U.S. economy is on the verge of a strong recovery. “The panic’s hasty retreat should not be confused with robust recovery,” Federal Reserve Governor Kevin Warsh said. “The rather indiscriminate bounce off the bottom — across virtually all assets and geographies — may be more indicative of a one-time reset, which may or may not be complete.” He also said “private demand, the true arbiter of economic performance, remains weak even while government spending has surged, and the jobless rate is likely to peak at a higher rate, and linger longer at those high rates, than in recent recessions.”
MBA Mortgage Applications are due out today, followed by May CPI and the 1st quarter current account balance and DOE crude oil inventories. In addition, Fed Chairman Bernanke will speak at the Financial Literacy Summit in Washington.
The cost of living in the U.S. rose less than forecast in May, culminating in the biggest 12-month drop in prices in almost 60 years.
The consumer price index increased 0.1% in the United States after no change a month earlier, the Labor Department said today in Washington. In the 12 months ended in May, costs dropped 1.3%, the biggest decline since 1950.
Higher commodity prices, including gasoline, will probably restrain Americans’ discretionary spending at a time when the economy is showing signs of stabilizing. The lack of sustained gains in sales is one reason companies are finding it difficult to pass increasing costs on to customers.
European stocks fell for a 4th day, the longest losing streak since the rebound began in March, on concern the global economy will be slow to recover from the recession. The Dow Jones Stoxx 600 Index of European shares slid 1.6% in London after a 3-month, 36% rally that drove price-earnings valuations to the highest levels in 5 years.
While U.S. President Barack Obama said “you’re starting to see the engines of the economy turn,” in an interview with Bloomberg News, he also said “it’s going to take a long time” for a full recovery. The jobless rate will continue to climb from its current 25-year high of 9.4% to 10% as employers balk at taking on new workers, the president said.
On March 9th when stock markets hit a low, investors assumed we would go into a depression and that major U.S. banks would be nationalized. This is no longer the case but stocks will endure some upside headwinds as they have posted some strong gains, valuations have been stretched and now it’s time for the economy to catch-up.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
