The Canadian stock market advanced into positive territory by the end of the day and ended above 11,000 points for a 2nd day. Oil prices turned positive and the base metals sector boosted the index for the 2nd day in a row. The S&P/TSX composite index gained 26.23 points a day after a 230 point advance saw the index climb above 11,000 points for the 1st time in 10 months.
Although earnings and economic news continue to be fairly upbeat, investors appear reluctant of taking the market too high too quickly and analysts are expecting stocks to drift after such a big advance. In short, expect to see some profit taking after such a big advance. We are in unchartered territory to some extent — the stock market does not go straight up and in lieu of additional ‘news’ you could see a ‘healthy correction’. In general, companies have exceeded profit expectations by reducing costs and selling inventory but now they need to demonstrate revenue growth and profit growth which will only materialize once the economy starts to grow again.
In the United States stocks slipped after weak data on the services sector and private payrolls cooled recent optimism that the recession was retreating. The market finished off its lows as investors bought up riskier financial shares. The stock market’s decline came after a 4-day rally that had driven the three major U.S. stock indexes to close on Tuesday at their highest levels in 9 to 10 months. The services sector contracted in July, data showed, while another report said private employers cut 371,000 jobs last month. The ADP private sector jobs report increased investors’ caution ahead of Friday’s government data on July non-farm payrolls. A Reuters poll of economists predicted Friday’s payrolls report, which includes private and public employment, would show 320,000 job cuts in July, down from 467,000 in June.
The Institute for Supply Management’s services index dropped to 46.4 in July. Any reading below 50 indicates a contraction in the service sector, which accounts for about 80 percent of economic activity in the United States. The Commerce Department said new orders received by U.S. factories unexpectedly rose in June, advancing for a 3rd straight month. The data reminds everyone this economic healing process will take some time and it may be a jobless recovery.
The Dow Jones industrial average declined by 0.42%, the Standard & Poor’s 500 Index declined by 0.29% and the Nasdaq Composite Index declined by 0.91%.
Investors are hopeful, based on all the data that we have seen a floor for capital markets, the housing market and the overall economy here and that we will start seeing a long, slow recovery in the economy. But hopes on this front also come with a caveat, and analysts said a swift rebound from the housing market’s worst slump since the Great Depression is not on the horizon and that economic activity is still subject to various shocks.
In short, we cannot declare victory yet but we are seeing the light at the end of the tunnel — now we need to continue moving forward and avoid set-backs. This morning stocks are looking positive but the price of various commodities is under some pressure thus the Canadian stock market may under perform its global counterparts.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
