The Canadian stock market followed its heavyweight financial shares to a higher close on Friday, helped by data from the United States that offered further evidence that the recession may be losing its grip on the economy and hitting a bottom in 2009. The financial sector, which accounts for about a 1/3rd of the index, rose 1.85% to its highest closing level since early November after data showed U.S. consumer spending rose in May for the first time since February. The fact that consumers in the United States have actually made a very rapid adjustment to this new environment suggests that we will see consumers spending at a pretty normal pace (see chart below highlighting the dramatic change in spending habits. Conversely consumer spending at current rates is more sustainable over the long-term if consumers are also saving i.e. spending less then they are currently making which was not the case in the past).
The gain in the TSX index would have been much greater if not for the slide in its energy and materials sectors, both of which fell as commodity prices backed off recent highs. The S&P/TSX composite index closed up 0.33%. For the week, the index rose 0.99%, a big turnaround from the lowest point in the week, on Tuesday, when it was down 5.4% after the World Bank said that prospects for the global economy remained “unusually uncertain” (that is more than 6.4% in less than 4 days).
The TSX will be closed on Wednesday, July 1, for Canada Day, while U.S. markets will be closed on Friday, July 3, for Saturday’s July 4 Independence Day holiday. Stocks markets are expected to be volatile in coming weeks as reports may continue to offer differing views on where the global economy is headed. Last week 2 reports released had opposite influences on the direction of stock markets - the World Bank painted a dark picture while the Organization for Economic Co-operation and Development said the global downturn is close to a bottom.
In the United States the Nasdaq rose on Friday, on strong demand for Palm’s smart phone, while the Dow was dragged lower by sliding oil prices and strength in some financial stocks helped cushion the S&P 500’s decline. Weighing on investor sentiment is a jump in the savings rate suggested that the debt burdened U.S. consumer may not drive the economy out of recession as fast as hoped (see chart above). Data showed that while consumer spending and income both rose in May as the government stimulus spread through the economy, much of the money was being stored away. Savings jumped to a record annual level of $768.8 billion, the highest level since record keeping began in 1959.
The United States consumer is probably going to lag behind the rest of the world because they need to pay down debt, increase their savings rate and be better stewards of their own capital, which might lead to lower consumer spending versus the rest of the world. The Dow Jones industrial average declined by 0.40%, the Standard & Poor’s 500 Index declined by 0.15% and the Nasdaq Composite Index gained 0.47%.
The Chicago Board Options Exchange (CBOE) Volatility Index or VIX, Wall Street’s most popular indicator of investor anxiety or fear, closed at 25.93 (it did hit a high of more than 80 and must trade in a range between zero and 100), its lowest level since September 12th, the Friday before Lehman Brothers went into bankruptcy. For the week, stocks finished mixed. The Dow slid 1.19% and the S&P 500 fell 0.25%, while the Nasdaq rose 0.59%.
Tomorrow we will hear more about housing prices in the United States with the S&P/Case-Shiller Home Price Index likely falling at the fastest pace on record in April (19.1% year over year and 34% from the peak) in the United States. This won’t help the estimated 1 in 5 homeowners (15 million) who have more debt in their home than the market value of their home. Millions of other owners have vanishing equity in their homes. But lower prices have led to the best affordability on record, attracting 1st time buyers and putting a floor on home sales. Pending home sales will be out on Wednesday. They have climbed 3 straight months to April, but likely retreated a bit in May due to higher mortgage rates (which are dropping again).
U.S. stock futures pointed to a modestly higher open
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
