Canada’s main stock market finished lower yesterday as investors decided to book some profits after 5 straight days of gains. The pullback was broad, with 8 out of the 10 main sectors trending lower. The two advancing sectors of financials and health care rose 0.45% and 0.18%, respectively. This is not unexpected since the market has appreciated a lot this month. Conversely, on every dip the stock market continues to display impressive resilience as investors come in and buy more stocks on dips.
The S&P/TSX composite index dropped 0.24%, among the falling sectors, the energy sector dipped down by 0.4%, while the resource heavy materials sector dipped 1.37%. Oil prices slipped slightly as U.S. equities fell, again raising concern about the economy and a rebound in energy demand. Oil appears to follow stocks and the dollar up or down. Oil has tracked equities markets closely in recent months as investors look to stocks as a leading indicator of an economic recovery that could boost ailing energy demand and bolster oil prices. However, there is sufficient supply of oil as the U.S. Energy Information Administration (EIA) said on Wednesday that inventories of oil in the United States, which is the world’s top energy consumer, rose more than expected last week to their highest since 1983.
That said we are experiencing a significant improvement in investor confidence but that must be balanced with a significant advance in stock markets and a bottoming out of the current global recession. Stocks will advance in the long-term but it will be a volatile.
Inflation data released yesterday in Canada had little impact on the stock market. The data showed prices fell by 0.8% in August compared with a year earlier, the 2nd largest 12 month drop in over 50 years.
In the United States stocks slipped after 3 days on concern recent gains were overextended despite the latest round of solid economic data. Analysts said investors were trying to assess whether further market gains were justified, with the benchmark S&P 500 now up 58% since its early March lows (in $US dollars). Data showed business activity in the Mid-Atlantic states jumped more than expected in September and advanced to its highest level since June 2007, underscoring hopes that the economic recovery was on track and sustainable.
The Dow Jones industrial average fell by 0.08%, the Standard & Poor’s 500 Index fell by 0.31% and the Nasdaq Composite Index fell by 0.30% (up 8 out of the last 9 days — not bad).
New construction of U.S. homes and permits for future building hit a 9 month high in August, and the number of people filing new claims for jobless benefits fell last week, suggesting a recovery was underway. The Commerce Department said housing starts rose 1.5% from July to an annual rate of 598,000 units. In another report, the Labor Department said the number of workers filing new claims for jobless benefits fell by 12,000 last week to 545,000, the lowest level since early July. We are at that stage when an economy pulls out of a recession. The recovery will materialize due to government policy and intervention and inventory restocking. It will be a “U” shaped recovery with some bumpy parts (which some will call a “W” shaped recovery as unemployment remain high). Housing starts are still down 29.6% over the past year.
The housing market, the main trigger of the recession that started in December 2007, is showing steady signs of healing and analysts expect home building activity to contribute to economic growth this quarter. Activity has been supported by the government’s $8,000 tax credit for 1st time home buyers. Treasury Secretary Timothy Geithner said the Obama administration had not yet decided whether to extend the program when it expires at the end of November, but looking was closely looking at the issue. The Fed meets next week and the debate will center on a strategy to withdraw the extraordinary support the central bank is providing the economy. It is seen leaving its benchmark overnight lending rate near zero.
The Labor Department report showed the number of people still on jobless aid after an initial week of benefits increased by 129,000 to 6.23 million in the week ending September 5th. In short, the employment outlook remains fragile although, companies have significantly cut back on layoffs.
This morning the MSCI World Index of 23 developed nations dropped 0.3% in London, the biggest slide in 2 weeks. North American equity markets look to open flat to down with oil prices declining by about 1% this morning. Swings and trading volume may be greater than average today because futures and options on indexes and stocks are due to expire since today is the 3rd Friday of the month.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
