Canadian stock markets dropped on Friday, finishing the week 2.04% lower, after investors severely punished Research In Motion (RIM) for an outlook that raised concerns about the BlackBerry maker’s growth prospects. RIM shares have long been notorious for going up significantly after a positive earning release and earnings releases have been positive for a very long time. RIM shares were the biggest drag on the market, sliding 16.8% and pulled the information technology sector down 5.4%. After the market closed on Thursday, the company unveiled profit and revenue estimates that fell short of what analysts had been expecting.
The energy sector rose by 0.38% as crude prices edged higher on tension over Iran’s nuclear program. The S&P/TSX composite index closed down 0.65%. The drop in equities followed data earlier in the week suggesting that equities could incur additional headwinds. This included Friday’s weak reports on U.S. durable goods orders and new home sales that compounded fears that the recovery from the global recession would be slow and weak and not as quick as some investors had expected. The materials sector ended down 0.86%. Investors are becoming a little more cautious on the capital markets as the S&P/TSX Composite index closed down in 4 of the week’s 5 days but still ended the week up 49.8% above the 5-year low it hit on March 9, 2009. Stock markets have been resilient only to pause for profit taking before moving higher.
In the United States stocks fell for a 3rd straight day on Friday on disappointing housing and durable goods data, while RIM dented optimism about technology spending. Economic reports showed that new orders for long-lasting U.S. manufactured goods fell by their biggest margin in 7 months, while August sales of new homes fell short of Wall Street’s expectations, raising questions and doubts about the strength of the current global economic recovery. With stocks up a lot in a very short timeframe the tolerance threshold for less-than-stellar economic data that easily exceeds expectations has declined as investors seek justification for the strong run up in stock prices and their respective valuations.
The Dow Jones industrial average declined by 0.44%, the Standard & Poor’s 500 Index declined by 0.61% and the Nasdaq Composite Index declined by 0.79%. For the week, the S&P 500 fell 2.2%, the Dow dropped 1.6% and the Nasdaq declined 2%.
As mentioned, new orders for long-lasting U.S. manufactured goods fell and sales of new homes were below expectations, government data showed. The Commerce Department reports overshadowed a jump in consumer confidence this month (to its highest since January last year) and were the latest indication that growth could taper off once the government stimulus expired. Durable goods orders tumbled 2.4% after rising 4.8% in July, well below market expectations for a 0.5% rise in August. In another report, the department said sales of newly built single-family homes rose 0.7% in August for a 5th straight month, the highest since September last year. However, the increase was below market forecasts. The trend is continuing to be positive, but not robust enough for growth to justify current valuations because consumer spending is weak.
In short, this economic data served as a reminder that global economic recovery from the worst recession since the 1930s will be protracted and bumpy – the quick recovery thesis is being tested. In short, investors are going to start worrying about the expiry of fiscal stimulus measures supporting the housing market and uncertainty about the potential impact of the Federal Reserve’s ‘exit strategy’ availability of credit to critical areas such as car and mortgages. Federal Reserve Chairman Ben Bernanke said on Friday consumer and small business loans remained in great need of the U.S. central bank’s support even as use of other financial backstop programs tapered off as markets regained balance.
In the 2-day meeting in Pittsburgh, leaders from the Group of 20, rich and developing countries agreed to avoid any premature withdrawal of stimulus, which they pledged to keep in place until sustainable recovery was in place. They declared their crisis-fighting efforts a success on Friday and promised to give rising powers such as China more say in rebuilding and guiding the global economy. They also want to implement tougher rules governing banks by 2012. “Here in Pittsburgh, leaders representing two thirds of the planet’s population have agreed to a global plan for jobs, growth and a sustained economic recovery,” British Prime Minister Gordon Brown said. U.S. President Barack Obama’s 1st turn hosting a major summit ended on an upbeat note, with leaders claiming victory in stopping the recession from turning into a depression, an outcome assumed by capital markets on March 9th of this year. “Our forceful response helped stop the dangerous, sharp decline in global activity and stabilize financial markets.” Obama said, “We cannot tolerate the same old boom-and-bust economy of the past. We can’t wait for a crisis to cooperate. That’s why our new framework will allow each of us to assess the other’s policies, to build consensus on reform, and to ensure that global demand supports growth for all.”
This morning things are looking flat to down as commodity prices have ticked down by a margin amount.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
