Canada’s main stock market hit its highest level in nearly 2 weeks yesterday as a rise in the price of oil helped push up shares of energy companies. Energy shares rallied alongside a surge in oil prices to near $73 a barrel after data showed crude stocks in the United States fell more than expected last week. The bulk of the gains came in the first half of the day. The S&P/TSX composite index ended up 0.83%, at 11,637.04, which marks the highest level since earlier in the month. Given the dramatic gains that we have seen in stock markets it is unlikely that we will see a material move up heading into the holiday-shortened-week next week and then into the new year. Expect stocks to move up or down by a nominal amount but be somewhat directionless until the new year.
In the United States stocks finished flat to slightly higher after the Federal Reserve reiterated its intention to keep interest rates low for the foreseeable future to ensure a sustainable economic recovery. Wall Street did trim gains after the Fed voted unanimously to keep benchmark borrowing costs in a range of zero to 0.25%, which represents historic lows (see chart below). The central bank’s policy-making committee also reminded investors it will let most of the special liquidity facilities, which have helped bolster the U.S. banking system after last year’s credit crisis, expire by early next year. Financial stocks, which had initially climbed after sources said global banking regulators will give institutions a grace period before enforcing more stringent capital rules, also slipped after the Fed’s statement. The S&P Financial Index rose 0.7%, retreating from earlier gains of more than 1%.
The Dow Jones industrial average slipped 0.10% but the Standard & Poor’s 500 Index gained 0.11% and the Nasdaq Composite Index added 0.27%.
Earlier in the day, data from the U.S. Labor Department showed the overall U.S. Consumer Price Index (CPI) rose 0.4% in November, in line with expectations, which eased inflation worries and lifted stocks. Home builders’ stocks climbed after Commerce Department data showed new U.S. housing starts increased 8.9% in November, the largest monthly percentage gain since May, indicating the housing sector remains on a steady recovery path.
Some news from Washington or Capitol Hill saw that two new bills were introduced to reinstate the 1930s-era Glass-Steagall Act to split commercial and investment banking. The proposed legislation is part of an effort in Congress to curb Wall Street’s excesses after last year’s financial crisis and the meltdown in the stock market.
As mentioned the Federal Reserve voiced growing optimism about the U.S. economy as job losses slow, but repeated a vow to keep interest rates unusually low for “an extended period.” In a unanimous decision, the U.S. central bank left benchmark overnight rates on hold in a zero to 0.25% range, as widely expected. Underscoring the economy’s recovery, the Fed in a post-meeting statement highlighted improvement in the housing sector and noted last month’s decline in the unemployment rate. “Economic activity has continued to pick up,” the Fed said at the conclusion of a 2-day meeting. “Deterioration in the employment market is abating.” Underscoring improving conditions for banks, the Fed said it would stand by plans to cut most of its emergency lending facilities on February 1st showing growing confidence that credit markets could stand on their own. Despite such steps and comments, a Reuters poll taken after the policy decision found that most U.S. primary dealers and banks that deal directly with the Fed, do not expect any interest hikes until the 1st quarter of 2011. The U.S. economy returned to growth in the 3rd quarter, expanding at a 2.8% annual rate, signaling the end of the most severe recession since the 1930s.
With the economy expanding, investors are wondering when and how quickly the Fed will begin to wind down its monetary support. That day appeared a small step closer, given the central bank’s increasingly upbeat comments. A string of recent reports has shown the recovery gathering strength. Industrial production and consumer spending, which slumped when credit markets seized in late 2008, are on the rise, and the pace of job losses has slowed sharply. Still, the Fed made clear it was in no rush to tighten borrowing conditions either, given the lack of an immediate inflation threat in the face of high unemployment. In November, the jobless rate edged down to 10%, just off a 26 ½ year high, but Fed officials expect it to remain above 9% at least through the end of next year. “Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the central bank said.
The Senate Banking Committee is set to vote on Bernanke’s nomination for a 2nd term today. While it is widely expected to recommend the full Senate approve it, many lawmakers have been vocally critical. Yesterday, Bernanke earned some reprieve as Time Magazine said it had named him “Person of the Year.”
Chairman Ben Bernanke also said yesterday that U.S. banks have been stabilized but lending remains too weak to support a healthy recovery. “We have told the banks very clearly that we want them to make loans to creditworthy borrowers, where there are borrowers who can repay the loans.” After a “near-death experience,” banks are wary of taking on the kind of risk that led to the crisis although they have rebuilt capital, he said.
As mentioned U.S. consumer prices rose modestly last month, the Consumer Price Index (CPI) rose 0.4% in November after a 0.3% gain in October, pushed up by a strong increase in energy costs. Excluding food and energy, however, prices were flat, cooling inflation worries in financial markets.
On a year-over-year basis, core inflation slowed to a 1.7% gain in the period through November from the 1.8% rise in the 12 months through October.
Stocks should post a 2nd straight year of gains in 2010 as an economic recovery brightens the profit outlook, extending the market’s rebound from their March lows, a Reuters poll showed yesterday. Most of the upside is forecast for the 1st half of the year as investors bet on a more stable economy boosting sectors like technology, industrials and materials. The 2nd half of 2010 will be more muted as investors seek clarity on when and how the U.S. Federal Reserve might tighten monetary policy by raising interest rates or draining the financial system of excess cash. The survey of about 40 analysts at top Wall Street dealers, brokerages and fund managers taken over the last week showed a median target of 1,208 for the benchmark Standard & Poor’s 500 index at the end of next year. That’s an increase of roughly 10% from the S&P 500’s closing price yesterday of about 1,100.
The S&P 500 will like appreciate by more than 20% this year and more than 60% from the March low. Last year, the S&P closed down 38%, its 1st annual loss in 6 years and the worst drop since the 1930s. The stock market crash and deep economic downturn followed months of housing and credit market problems, and then, in September 2008, the collapse of Lehman Brothers. The Fed took aggressive steps to keep the U.S. economy afloat, including pushing interest rates to near-zero levels and taking a series of extraordinary steps aimed at backstopping financial markets and getting credit flowing again.
This morning the U.S. dollar rose to the highest level in 3 months against the Euro while stocks and commodities fell as Greece’s bond downgrade increased concerns that “spiraling” national debts may hurt the global economic recovery. Standard & Poor’s decision yesterday to reduce Greece’s credit rating for the 2nd time this year raised concern among investors that the worst global recession since World War II is still weighing on some economies. European stocks are down about 0.50% and so are North American futures. Commodities like oil and gold are down about 1.0%
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
