Canada’s main stock index finished slightly yesterday as Canadian Imperial Bank of Commerce (CIBC) reported quarterly results that missed investor expectations and in turn, investors took a rest from the incredible rally we have experienced in previous 5 months. CIBC banks shares fell by over 5% on the news but overall, the financials sector was flat, down 0.06% as other banks offset the loss posted by CIBC. The S&P/TSX composite index was down 0.08% on a very volatile day which saw stocks open down 1% before making a recovery. The energy sector was down 0.01% and materials sector was off 0.49%.
Oil slipped extending the large losses from Tuesday as rising stockpiles of U.S. crude outweighed positive economic data. Oil prices fell $0.62 to settle at $71.43 a barrel, after falling $2.32 the previous day. The U.S. Energy Information Administration (EIA) reported that crude stocks in the world’s largest energy consumer rose by 200,000 barrels last week due to a rebound in imports.
The increase in stockpiles was unexpected; analysts expected a 1.1 million barrel drop. The surprise reignited worries over soft recessionary demand. In short, there is still massive over-supply which does appear to be peaking but it will remain volatile in the short-term. Oil traders have been taking the opportunity to book profits after crude prices touched the psychologically important $75 mark this week, crowning a nearly 130% jump in oil prices from the lows last December. Venezuela’s oil minister Rafael Ramirez said OPEC is unlikely to raise output at its September meeting, despite concerns that oil prices are too high for a still fragile global economy at the meeting, scheduled for September 9th in Vienna.
In the United States, investors stayed cautious after a rally, leaving stock markets little changed despite solid reports on new home sales and durable goods orders. In July, sales of new homes rose at their fastest pace in 10 months, the U.S. Commerce Department’s data showed. The Commerce Department on Wednesday said sales of new single-family homes rose 9.6 percent from June to an annual pace of 433,000 units, the highest rate since September. It was the biggest gain since February 2005 and it reduced the supply of unsold homes on the market to its lowest level in more than 16 years, another sign that housing activity had stabilized after a 3 year decline.
Durable goods excluding transportation rose 0.8%, below expectations, although overall durable goods orders posted the largest jump since July 2007, a separate Commerce Department report showed. After the run up that has pushed the broader S&P 500 index up 52% from its 12 year closing low on March 9th, analysts have been questioning the rally’s strength even as economic data points to improved demand. These big ticket goods are displaying normal recovery patterns, signaling that the early phase of this recovery may be stronger than people are anticipating however; it does not mean it will be sustained.
The Dow Jones industrial average advanced 0.04%, the Standard & Poor’s 500 Index advanced 0.01% and the Nasdaq Composite Index advanced 0.01%. Industrial stocks dropped, in part after China said it would take steps to curb overcapacity among steel and cement producers.
As mentioned, sales of new U.S. homes hit their highest level in 10 months and orders for long lasting manufactured goods jumped, offering more evidence a modest economic recovery is taking hold in the United States. The data is the latest hinting that the U.S. economy’s worst slump in 70 years is coming to a close, though analysts caution that recovery will be sluggish as consumer demand will be negatively impacted by high unemployment. In addition, there are fears the housing recovery could be negatively impacted when the government tax credit of up to $8,000 for 1st time home buyers is not extended. The credit is due to expire at the end of November. This is not unlike the cash for clunkers program in the United States which recently ended but refueled car sales (excuse the pun).
Will we see a decline in stock markets? Many have warned of a decline, where the stock market gives up the gains of more than 50% posted by major stock indices since March 9th. Yet the stock market has gone from strength to strength as the economy emerges from the worst recession since the 1930s. Those waiting for a much talked of pullback of 10% (which did happen from mid June to mid July) or more may be waiting for a while, if previous stock market experiences are any guide (sometimes we chart new territory). The rallies that commenced after the 2 most recent U.S. recessions ran longer than stock market pessimists expected. About 6 months in advance of when the United States pulled out of recession in March 1991 the stock market began to rally and it ran for 7 years - the S&P 500 had more than tripled in value without ever pulling back by 10%. This was not the only time stock markets have run ahead without a significant correction. Coming out of a bear market after the dot-com bubble, the S&P 500 jumped 95% from 2003 to 2007, again, without a 10% correction.
On March 9th when the S&P 500 hit an intraday low below 700 (it is well over 100 today), investors were pricing in or assuming a doomsday scenario in the economy and financial markets. That nightmare scenario is now no longer a scenario as signs of recovery continues to sprout. The stock market run comes amid a still uncertain outlook for the economy and rising government debt, the ongoing deleveraging of business and consumers and higher unemployment. Investors took 2nd quarter earnings results as a positive, but companies used cost cutting as a means to achieve better earnings and not revenue growth as demand was still down. Some worry about a double-dip recession as foreclosures and commercial real-estate problems mount in the United States. However, it is clear that economic improvement and stock market gains are not one and the same.
One thing is very clear – up or down volatility and investors nerves will remain high.
This mornings things are looking relatively flat.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
