The Canadian stock market incurred a major pull back yesterday as a report from the World Bank said the global economy will shrink much more than expected this year, lowering hopes for a strong economic recovery later in 2009 putting a ‘pin’ into the ‘balloon of investor optimism’.
The main S&P/TSX composite index dropped 453.77 points or 4.4% to 9,834.18 (below the key 10,000 philosophical milestone) its 1st close below the 10,000 mark since May 11th and the worst single day point loss since early December 2008.
The World Bank said that the world economy will shrink 2.9% in 2009 compared with a previous forecast for a 1.7% decline made in March of this year. The stock market losses added to a drop of over 3.3% on the TSX last week as investors wonder if the rally, which had boosted the TSX by as much as 41% on hopes for an economic recovery by year’s end, was running out of momentum. Conversely, stocks in Canada have dropped by almost 1,000 points recently.
Investors don’t think the stock markets got it wrong, the economy is bottoming out and turning. How strong the economic recovery will be is still open for debate. Equity markets have rallied strongly from recent lows and are still a long way from previous peaks. In the short term we will likely not test new lows or highs.
All sectors were lower but falling oil & mining stocks led the way down (they have led on the way up). The energy sector fell 6.5% as a strong U.S. dollar helped push the July crude contract on the New York Mercantile Exchange down $2.62 to US$66.93 and well off the 7 month high of US$73 a barrel. The base metals sector (materials) was down more than 9% as the price of copper in New York fell and the August gold bullion contract was down $15.20 to US$921 an ounce, taking the gold sector down 5.5%. The financial sector fell 3.5%.
In the United States stocks suffered their worst 1 day loss in 2 months, dropping the S&P 500 back into negative territory for the year in a broad-based sell off, as investors reconsidered the health of the economy and their overall risk appetite.
Shares of sectors tied closely to the overall economy like financials, energy and materials led the S&P 500’s decline. Investors were keen to sell shares that led the market up in its rally since early March. Major averages have largely been trading sideways in recent weeks and many investors have speculated that more obstacles were in store for stock markets. In short, the recovery in the economy and earnings is unlikely to be as strong as the rise in stock prices since early March.
The Dow Jones industrial average dropped 2.35%, the Standard & Poor’s 500 Index dropped 3.06% and the Nasdaq Composite Index dropped 3.35%. In the United States the S&P financial index fell 6.2%, while the energy sector dropped 4.6%. The financial sector had the biggest gains since the S&P 500 hit a 12-year closing low in early March 9th in the United States.
Adding to a glum economic outlook, Walgreen posted weak quarterly results as U.S. shoppers focused on buying only necessities (major U.S. drugstore chain).
Despite this, markets are looking up this morning and will be looking for further information from the Fed meeting this afternoon.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
