The Bank of Canada is declaring the recession essentially over, saying Canada’s economy will begin growing this summer after 9 months of stagnation and will lead most of the industrialized world in an economic recovery next year. The assessment contained numerous cautions and caveats but it still had a positive ripple through the markets, lifting the Canadian dollar and stock markets. “We believe the economy will grow this quarter,” Bank of Canada Governor Mark Carney said. “Things are unfolding a little faster in terms of the recovery in (consumer and business) confidence and financial conditions.” However, renewed economic growth will not lead to job growth until much later, when companies regain confidence and begin hiring again.
The Bank of Canada seems to think the worst is behind us and perhaps better times are ahead. The stock market usually anticipates the economy 4 to 6 months ahead. The S&P/TSX composite index closed up 243.33 points, or 2.33%, at 10,675.68, its highest level since June 12th. Firm oil and metals prices also encouraged big gains in the index’s resource sectors, with the energy group advancing 2.94% and the materials group rising 2.25%. The financial sector, which accounts for about a 1/3rd of the TSX index, jumped 2.83%, boosted by the Bank of Canada’s assessment and by better than expected corporate earnings in the United States.
In the United States stocks surged, driving the Dow industrials above the key 9,000 mark for the 1st time since January, as strong corporate profits and rebounding home sales spurred optimism about the economy. Although, after the bell Microsoft, Amazon.com and American Express posted disappointing quarterly results which is a sharp contrast to robust results delivered by diversified manufacturer 3M and telecommunications giant AT&T reported before the bell, giving the broader market a strong start on the day.
The Nasdaq registered its 12th straight day of gains, its longest winning streak since 1992. The rally that we have seen so far is the breadth of it. It’s not really confined to a single sector and it is broadly spread. It is helping to restore investor confidence, given the trauma and shock that people went through.
The Dow Jones industrial average jumped 188.03 points, or 2.12%, to end at 9,069.29 the highest close since November 2008. The Standard & Poor’s 500 Index gained 2.33% and the Nasdaq Composite Index gained 2.45%. The string of good news helped the S&P 500 punch through a critical technical resistance level at 960, sparking a rally that lifted the benchmark index to 979.42 it’s highest intraday level in 8 months.
That breakout, according to some analysts, was an indication that the S&P 500 could take aim at the 1,000 mark. The S&P 500 is now up 44.3% since its 12 year closing low on March 9th. But it’s still 37.6% below its record closing high of 1,565.15 in October 2007. For the year, the Nasdaq is up 25%, while the blue-chip Dow average is up 3.34% and the S&P 500 is up 8.09% (in U.S. dollars).
The National Association of Realtors (NAR) in the United States said sales of existing homes in June rose 3.6% to an annual rate of 4.89 million units, compared with a 4.72 million pace in May. The June reading was the fastest sales pace since October, and topped forecasts for a 4.84 million unit annual pace. This is a very good report, as it suggests that the recent momentum in U.S. housing activity may be gathering some traction as U.S. homebuyers take advantage of the very favorable mortgage rates and home prices. The NAR said it was the 1st time the industry had experienced 3 straight months of gains in existing home sales since early 2004.
“Overall, the news is positive. We have increasing home sales for the 3rd straight month, declining inventory and although prices fell, they declined at a less steep pace,” NAR chief economist Lawrence Yun said. “The housing market is healing after four years of recession.” The inventory of existing homes for sale declined 0.7% to 3.82 million in June. The median national home price came in at $181,800, down 15.4% from the same period a year ago. But the median price was up 4.0% compared with May and was at the highest level since October. In short, supply is coming down and prices are stabilizing which should lend support to an upcoming recovery.
This morning, U.S. stock futures rose as reports on the European economy and better than estimated earnings at Schlumberger Ltd. helped offset disappointing results from Microsoft, American Express and Amazon.com last night after the bell. Schlumberger, the world’s largest oilfield services provider, climbed 1.2%. Reports today showed Europe’s manufacturing and service industries contracted more slowly in July, while German business confidence increased for a 4th month. Microsoft, American Express and Amazon.com Inc. retreated more than 5% which will make it hard for the Nasdaq to continue to build on its impressive set of gains but not impossible (it’s on its longest winning streak since 1992).
There is panic buying, even when earnings are not great you fear being left out of the rally. Yesterday, the S&P 500 climbed to the highest level since President Barack Obama was elected on November 4th of last year.
Stocks may rise further after reaching 8 month highs, according to followers of the century old Dow Theory. As the Dow average climbed to the highest level since November 5th, the Dow Jones Transportation Average, a measure for airlines, shipping companies and railroads, broke through a May peak as it jumped to the best level in 6 months. Dow Theory says that when the measure for transport companies and the Dow Average both post new highs, equities are likely to gain. The Standard & Poor’s 500 Index recovered 50% of the losses suffered after the September collapse of Lehman Brothers, as a record number of U.S. companies beat analysts’ earnings estimates. Investors are pouring money into shares on speculation the fastest rally since the Great Depression will reverse losses from last year. I think that is a safe assumption but we just don’t know the timing nor do we know how much or how little volatility investors will have to continue to endure prior to reestablishing new highs, not to mention the fact that there is still a long road ahead but…. There is opportunity.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
