Canada’s main stock index shot higher on Friday, led by commodity related companies, after upbeat U.S. home sales data and comments by Federal Reserve Chairman Ben Bernanke renewed investor optimism about a sustainable economic and capital market recovery. Better than expected July U.S. home sales of previously owned homes signaled the housing market may be pulling out of its big 3 year slump. An exceptional 7.2% jump in the July sales of previously owned homes gave stocks a shot. This steady rise for a 4th consecutive month to the highest level in almost 2 years suggested some easing in the housing crisis. U.S. Federal Reserve Chairman Ben Bernanke said the global economy appears to be on the mend, though he cautioned the recovery would likely be sluggish and take time.
Expectations of rising demand helped push commodity prices higher, with oil closing at a 10 month high of $73.89 a barrel. In turn, that helped to boost the energy and materials sectors which were up 1.8% and 1.3% respectively. The S&P/TSX composite index closed up 130.67 points, or 1.22%, at 10,831.18, with all 10 of its 10 main sectors higher. The index declined by 0.2% for the week.
In the United States stocks ended the week at 2009 highs or year-to-date highs after a surprising rise in home sales and optimistic comments from Federal Reserve chief Ben Bernanke reassured investors about the prospects for an economic recovery. The S&P 500 and the Nasdaq hit 10 month intraday highs, while the Dow industrials rose to their highest level in 9 months. The S&P 500 is now up 51.7% from its 12 year closing low set on March 9th.
The Dow Jones industrial average advanced 1.67%, the Standard & Poor’s 500 Index advanced 1.86%, the Nasdaq Composite Index advanced 1.59%. For the week, the Dow rose 2%, the S&P 500 gained 2.2% and the Nasdaq climbed 1.8%. Stronger than expected 2nd quarter earnings have helped stocks post some strong returns in recent weeks. The S&P 500 is up about 11% since July 1st. Of the 480 companies in the S&P 500 that have reported 2nd quarter results so far, 73% have beat expectations, while 9% were in line with expectations and 19% were below forecasts according to Thomson Reuters.
U.S. Federal Reserve Chairman Ben Bernanke and other central bankers said on Friday the worst global recession in 70 years was nearing a close but warned it would be a long, slow climb back to normal growth. At an annual Fed retreat the officials said the coming recovery would have its ups and downs, and it was too soon to withdraw trillions of dollars in government and central bank support. “After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said. But both Bernanke and European Central Bank President Jean-Claude Trichet said there was still much work to be done to restore the global economy to self-sustaining growth. Trichet said he was “a bit uneasy” about talk of a return to normal and that policy-makers “should be as active as possible.”
This year’s event sounded more upbeat than a year ago, when Bernanke and his counterparts were still struggling to get ahead of rapidly deteriorating financial markets. Weeks after the 2008 annual retreat, Lehman Brothers bank collapsed and the United States rescued American International Group (AIG) marking the official start of the credit crisis. A large part of Bernanke’s speech was devoted to reliving those months, looking at how officials around the world responded and what lessons they had learned about how to regulate and monitor financial markets. “We must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again,” he said. Bernanke credited an aggressive, coordinated policy response for averting “the imminent collapse of the global financial system, an outcome that seemed all too possible.”
In the past couple of weeks, reports have shown that some major economies, including Germany, France and Japan, generated positive growth in the 2nd quarter, and various polls and opinions suggest that most economists think the current quarter will mark the end of the U.S. recession, which started in December 2007 (the longest since the Great Depression). What remains to be seen is whether that growth will be sustained since a large portion of that growth can be attributed to government stimulus spending.
Sales in July rose for the fourth straight month to hit an annual rate of 5.24 million units, the highest since August 2007, the National Association of Realtors (NAR) said. July’s increase was the largest monthly gain since the series started in 1999. The last time sales rose for 4 consecutive months was in June 2004, the NAR said. “The housing market has decisively turned for the better. We are bouncing back. A combination of 1st time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales,” NAR Chief Economist Lawrence Yun said. The housing market is at the epicenter of the worst U.S. recession in 70 years. A recovery in the housing market would help to draw a line under losses at financial institutions, which have been battered by defaults on mortgages.
It would also improve the psychology of households, whose net worth has been decimated by the plunge in home values, and encourage them to spend rather than save to make up for lost wealth, analysts say. Still, high unemployment threatens the recovery as many homeowners continue to lose their properties. A report from the Mortgage Bankers Association on Thursday showed late home loan payments jumped to a record high in the 2nd quarter, with almost 1 in 8 homeowners delinquent on their mortgage or in the process of foreclosure. The inventory of existing homes for sale in July rose to 4.09 million units, at July’s sales pace, that represented a 9.4 months’ supply. In short, the inventory overhang needs to be reduced further before house prices can start rising on a sustainable basis. In short, we could be very close or at a bottom but we have long way to go.
The Obama administration will raise its 10 year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report this week. The higher deficit figure, based on updated economic data, brings the White House budget office into line with outside estimates and gives further fuel to President Barack Obama’s opponents, who say his spending plans are too expensive in light of budget shortfalls.
Record breaking deficits have raised concerns about America’s ability to finance its debt and whether the United States can maintain its top-tier AAA credit rating (their debt will double in the next 10 years). Bond markets have been worried all year about the mounting deficit. The United States relies on large foreign buyers such as China and Japan to cheaply finance its debt, and they may demand higher interest rates if they begin to doubt that the government can control its deficits while pushing the value of its currency down.
Many economists think it is unlikely the government can curtail spending, which means taxes would have to go up to cover the rising costs of providing retirement and healthcare benefits to aging Americans. Higher taxes, which could slow economic growth, are also a major concern of voters on both sides of the political divide. Obama has promised not to raise taxes on Americans making less than $250,000 a year.
In short, things are looking and feeling better but there will always be something to worry about and that the next 10 years will be dramatically different then the prior 10 years.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
