Canadian stock markets fell sharply yesterday as news that Canada’s largest insurance company will cut its dividend in half rattled the market. The S&P/TSX composite index lost 253.56 points or 2.3%, reversing 4 consecutive days of gains that had seen Toronto’s main index advanced more than 5%. Stocks have advance significantly in the previous 5 months and reversed 50% of its losses. Investors will begin to question whether the rally is sustainable.
The financial sector was the biggest drag on the overall market, losing 5.6% on news that Manulife Financial will cut its quarterly dividend in order to build capital, despite a 79% jump in profits during the 2nd quarter. Manulife’s stock fell $3.89 or 14.8% to $22.36 but that is up from less then $10.00 in March. The financial sector has nearly doubled since the TSX hit its low on March 9th, so some profit taking should be expected. The base metals sector was also a drag, losing 3.6% on weaker metals prices. The energy sector was down 1.1% as oil prices were slightly lower, on more evidence of consumer anxiety and growing supplies of unused crude and natural gas. The gold sector gained 0.2% as the December bullion contract lost $3.40 to US$962.90.
In the United States stocks fell as investors turned cautious a day ahead of a crucial government report on July employment, and took profits after recent strong gains. The U.S. stock market’s 2nd day of declines came on the heels of a 4 day rally that pushed U.S. indexes on Tuesday to close at their highest levels since last fall. U.S. employers cut 247,000 jobs in July, far less than expected and making this the smallest number of cuts in any month since last August, according to a government report this morning that provided clear evidence that the economy was turning around. With fewer workers being laid off, the unemployment rate eased to 9.4% in July from 9.5% the prior month, the Labor Department said, the 1st time the jobless rate had fallen since April 2008. Analysts had expected non-farm payrolls to drop 320,000 in July and the unemployment rate to rise to 9.6%. Since the start of the recession in November 2007, the economy has lost 6.7 million jobs.
The Dow Jones industrial average dropped 0.27%, the Standard & Poor’s 500 Index dropped 0.56% and the Nasdaq Composite Index dropped 1%. Despite the latest pullback, the broad S&P 500 is up 47.4% from its 12-year closing low in early March. The rally has been driven by a string of economic data suggesting a recovery, and an earnings season with most S&P 500 companies beating expectations. Some positive data also came from July retail sales, as some U.S. retailers reported sales declines that were not as steep as expected. Investors are looking for signs of life among recession-weary consumers to help underpin a potential economic recovery.
U.S. stocks have entered a new bull market, and the S&P 500 index could rise as much as 10% from current levels by the end of this year, Goldman Sachs strategist Abby Joseph Cohen said on CNBC on Thursday. Goldman Sachs sees the benchmark Standard & Poor’s 500 index in a range of 1,050-1,100 toward year-end, said Cohen, the firm’s senior investment strategist and president of its Global Markets Institute. That range, she said, “is where we should be toward the end of this year. “We do think the new bull market has begun,” Cohen said. “It may prove it began in March of this year.” Cohen also said she expects the labor market to improve, but in “an erratic way. “It appears job losses are slowing, and there is some job creation going on,” she said. But “we have many more months of difficult labor situation ahead, even if the recession, using GDP or industrial production, is almost over.” “Many companies trying to be very cautious over last year really squeezed inventories down to levels that are unsustainable,” Cohen said on CNBC. “Even without any notable improvement in current demand, companies just need to have more stuff in the backroom to get their business done.”
Stocks this morning are pointing down but the payroll number will be the key catalyst pushing stocks higher or lower. I would expect things to remain volatile since investors will push stocks up on perceived good news but will not hesitate to take some profits in the event that they perceive additional short-term headwinds.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
