Canada’s main stock market finished higher yesterday, after “flirting” with break-even for most of the afternoon, following early buying that sent the resource-heavy index to a 13-month high. The market has done very well here in the past couple of weeks and each time it does well it takes a pause. The fact that we continue to go sideways as opposed to pulling back is constructive.
The S&P/TSX composite index finished the day up 0.2%, earlier; it rose to 11,702.24, which marked its highest level since October 2008. Energy and gold-mining stocks, which helped power the early rally, were among the later drags on the index as many investors ignored higher oil and record gold prices above $1,150 an ounce.
Also weighing on the market was Research In Motion (RIM), which fell 2% as the company was downgraded to “market perform” from “outperform,” citing concerns about its 2011 earnings.
In the United States stocks broke 3 days of gains following worrisome outlooks from two major software makers and a surprising drop in home construction last month. However, by the end of the day stocks sharply cut the day’s losses just before the closing bell as many investors pointed to a strong uptrend in equities that have pushed major indexes to 13-month highs in recent days. The S&P 500 has ended down only 3 times in the last 10 trading days.
The government said housing starts declined to their lowest level in 6 months, weighed down by a sharp fall in construction activity for both single-family and multi-family dwellings, a sign the housing market is still under pressure. Despite these setbacks, the equity market was experiencing tailwinds from low interest rates, government stimulus spending and signs of economic recovery.
The Dow Jones industrial average dropped 0.11%, the Standard & Poor’s 500 Index dropped 0.05% and the Nasdaq Composite Index dropped 0.48%.
While the decline in new construction raised concerns about the recovery, it could bode well for removing remaining inventory from the market, something analysts say must happen for the housing sector to recover.
As mentioned, construction of new homes in the United States hit a 6 month low in October, providing more evidence of the economy’s sluggish recovery, while a surge in the cost of new and used vehicles lifted consumer prices. The data came a day after a report showed U.S. industrial output barely budged last month (see blog from yesterday), suggesting the recovery stalled somewhat after a growth spurt in the 3rd quarter. The Commerce Department said housing starts dropped 10.6% to an annual rate of 529,000 units, the lowest since April. It was the biggest decline in 10 months. High vacancy rates, especially in the multi-family segment, and tight credit will slow building projects for a while. The slump in activity is a blow to the housing market, which had shown signs of stabilization after a 3-year slump. Homebuilding contributed to economic growth in the 3rd quarter for the 1st time since 2005. Home building or home renovation stocks have failed to regain much lost ground even with home owners refinancing their mortgages at lower rates.
Analysts said slow healing in the housing market, relatively benign inflation and excess slack in the economy meant the Federal Reserve would be able to honor its commitment to keep interest rates near zero for an extended period.
The Consumer Price Index rose 0.3% last month in the United States (0.1% in Canada) as the cost of new vehicles rose by the most it ever has in more than 28 years. However, widespread price pressures were absent and analysts attributed the rise in vehicle prices to the government’s now expired “cash for clunkers” program, which had depressed auto prices by offering discounts. Given weak auto sales, it was unlikely the rise in vehicle prices would be maintained going forward.
In short, expect weaker inflation in 2010 as a result of the substantial amount of spare capacity in the economy!
The global economic recovery especially in the United States is still very fragile thus, expect things to remain volatile but also expect interest rates to remain lower than expected for longer than expected.
This morning global stocks fell and Wall Street is expected to open lower by about 0.50%. Mounting doubts about the pace of the global economic recovery gains momentum amongst investors and ahead of more earnings reports from key U.S. retailers. Stock markets have rallied strongly since March 9th as investors reined in their economic doomsday or depression expectations to factor in a swifter than anticipated global economic rebound, but recent disappointing U.S. housing figures and mixed earnings from some of the country’s leading retailers have dented some of the optimism. Manulife Financial is selling up to $2.8 billion in common stock this morning at a 5% discount which will weigh on Canadian markets in combination with lower commodity & gold prices.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
