The Canadian stock market ended the Friday trading day with a solid gain in a broad-based advance, reflecting confidence that the spring rally still has legs (although, things have changed on the weekend, see below). The S&P/TSX composite index closed up 166.45 points to 10,287.95 as American economic data raised hopes that an economic recovery will be in place by the end of the year. The TSX finished the week down 357 points or 3.35%, the first weekly drop in 4 weeks. Investors have taken comfort from European Union leaders who said at a financial summit in Brussels that the current round of economic stimulus measures are cushioning the worst effects of the downturn and that no new ones are needed.

Statistics Canada reported that retail sales fell 0.8% in April to $33.5 billion, led by a 1.9% drop in the automotive sector. In short, we are not out of the woods yet. The TSX has recently lost some ground, after the rally which had boosted indexes by about 40% over 3 months, stalled over concerns that the U.S. economy won’t recover as quickly as hoped. TSX energy stocks have been under pressure as oil prices came down from 7 month highs of US$73 a barrel. On Friday, the July crude contract on the New York Mercantile Exchange lost early gains to move down $1.56 to US$69.81 a barrel (a further $1.25 this morning) on demand concerns but the energy sector ran ahead 1.3% on Friday. The financials sector was the strongest TSX sector up 2%.

In the United States the S&P 500 & Nasdaq rose on Friday as positive broker comments on Microsoft boosted technology shares, but the major averages lost ground for the week for the 1st time in 5 weeks. After a sharp 3 month rally, indexes eased this week as investors increasingly questioned if stocks are due for a correction. Worries that the economic recovery could be tepid have dented optimism that has driven the S&P 500 up as much as 40% from March 9th’s 12-year low.

The debate is emerging and it centers on a few very important questions. Do we need to stop here? Do we need to pull back a little here? Or can the stock market rally continue?

The Dow Jones industrial average fell 0.19%, the Standard & Poor’s 500 Index gained 0.31% and the Nasdaq Composite Index added 1.09%. The Dow fell 3% for the week, the S&P lost 2.6%, and the Nasdaq dropped 1.7%. Currently, the S&P 500 is up 36.2% since March 9th.

This morning stocks & commodities fell while the U.S. dollar and U.S. treasuries rose after the World Bank said the global economy will shrink 2.9% this year, a deeper recession than it predicted in March. The Dow Jones Stoxx 600 Index of European shares slid 1.2%, while Standard & Poor’s 500 Index futures slipped 0.7%.

The projection for a deeper economic slump than the 1.7% contraction forecasted in March, follows a 3 month, 44% rally that drove the price to earnings (P/E) ratio on the MSCI World Index to the highest level in 4 years. The Stoxx 600 trades at 24.6 times profit, near its most expensive level since March 2004, weekly Bloomberg data show. The MSCI World Index of 23 developed countries had a ratio of 18.2, a level not seen since 2004. Companies in the S&P 500 traded at 15.5 times profit, the highest multiple to earnings in 8 months, Bloomberg data show. The benchmark index for U.S. equities was valued as low as 10.1 times profit on March 9th the most recent market low, the cheapest since 1985, after the collapse of Lehman Brothers helped send the benchmark index for U.S. equities to a 17 month, 57% decline.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner