Canada’s main stock index ended modestly higher yesterday as the big banks continue to roll along with better-than-expected quarterly results from top Canadian banks providing support for the financial sector offsetting weaker commodity prices. Several of Canada’s biggest banks reported stronger-than-expected profits as an increase in trading revenues outweighed credit losses. The financials sector is home to Canada’s banks and insurance companies and the sector accounts for about a 1/3rd of the overall index. In turn, the financial sector can move the market. It rose 2.3% with Royal Bank of Canada leading the charge up 6.5%, Toronto-Dominion Bank up 3.2% and National Bank of Canada up 4.1%.
The S&P/TSX composite index rose 0.2% but 7 out of 10 sectors were lower which is pretty good considering stocks were down by 1% at one point. The gains were kept modest by weakness in the big energy sector, which dropped 1.2%, even as oil rose to settle at $72.49 a barrel, helped by a weaker U.S. dollar. Investors have said the market could lose some direction or momentum as it heads into September, the end of the earnings season, and considered one of the more volatile months of the year. Investors are taking a breather after pushing up the market by about 45% to 50% since early March 9th.
In the United States stocks closed higher as investors turned back an early sell off thanks to a rebound in oil prices. For the 1st 3 days of this week, stocks rose early and fell later, but yesterday the pattern reversed. The Dow Jones industrial average 0.39%, the Standard & Poor’s 500 Index gained 0.28% and the Nasdaq Composite Index gained 0.16%. Gains were led by a handful of troubled financial companies. The stock of bailed out insurer American International Group (AIG), as analysts cite a short squeeze, contributing to the run up as short investors have given up on bearish bets. Citigroup also jumped on a report that hedge fund manager John Paulson is buying the troubled bank’s shares. An S&P index of financial shares gained 1% but has more than doubled since March 9th.
Dell also reported better-than-expected profit and sales just before the market closed which helped with the late day boost in stocks. Investors have pointed to light summer trading and caution over a potential pullback as the reason for the market’s lackluster performance in the past week. Adding to that caution are concerns that an economic recovery may end up being weaker, slower or a W (double dip recession), than originally anticipated. Expectations of a recovery have fueled a 5 month long rally that has pushed the S&P 500 up more than 50% from March’s 12-year closing low. However, this view appears to be a minority view at this time.
The U.S. economy shrank less than expected in the 2nd quarter, despite a record drop in inventories, and fewer workers filed new claims for jobless benefits last week, a sign the economy was starting to heal. Gross domestic product (GDP) fell at a 1.0% annual rate, unchanged from an estimate last month, the Commerce Department said. Economists had expected a steeper 1.5% drop after a 6.4% collapse in the 1st quarter. A separate report from the Labor Department showed the number of U.S. workers filing new claims for jobless benefits fell by 10,000 to 570,000 last week, suggesting firms were not reducing their workforce as aggressively as they did early in the year.
“Everything around the data indicates that we are in a normal recovery out of a deep recession. The U.S. economy appears to be emerging from its longest and deepest recession since the Great Depression of the 1930s. The GDP report showed businesses were more aggressive in reducing inventories than previously thought. Business inventories dropped a record $159.2 billion in the 2nd quarter, more than the $141.1 billion estimated last month.
Analysts said the sharp drawdown in inventories in the face of weak demand had likely run its course, and that the lean level of stocks would provide a floor for an economic recovery many believe is already under way. Companies need to have something on the self to sell and eventually they will run out of inventory thus, they will need to produce something at some point.
The economy should enjoy something of a rebound over the next couple of quarters and we should see better times ahead. With unemployment high and rising, there are fears weak consumer spending will restrain the recovery’s momentum. Salary fell $235.7 billion in the 1st quarter and consumers still have a lack of credit and a legacy of debts and high unemployment. In turn, an economic recovery will take time to develop into a truly sustainable global economic recovery.
The U.S. economy appears to have stabilized and may not need all the stimulus the central bank had planned to offer, Richmond Federal Reserve Bank President Jeffrey Lacker said, he also stated that “The economy appears to have leveled out and I believe we can look forward to better times ahead.”
This morning things continue to look up as investors and consumers are becoming more confident that the worst is over and that things will eventually get better.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
