Canada’s stock market was sharply lower for a 2nd day in a row yesterday as economic concerns pressured commodity stocks while financials were pressured after U.S. President Barack Obama called for tougher regulations on banks. Data from China raised new concerns about how much China can really help developed countries pull out of a severe global economic slump. China’s economic growth came in at 10.7% in the 4th quarter of 2009 and 8.7% for the full year. The rapid growth reinforced concerns that Beijing will move to cut lending and tighten monetary policy to cap inflation, which could impede a global economic recovery. With this kind of growth China could overtake Japan as the 2nd largest economy in the world within a year and the United States as the biggest economy in the world by 2027.
The S&P/TSX Composite Index dropped 210.22 points, or 1.8%, to 11,469.10 and hit its lowest close in 5 weeks.
Canada’s economic recovery is gaining strength with the private sector beginning to play an increasingly important role in leading the country out of recession, the Bank of Canada said yesterday in its latest policy report. In a mildly upbeat assessment of the recovery, the central bank’s quarterly outlook contains some upward revisions for growth in the United States, China, Europe and Japan that should help Canada’s battered exporters and manufacturing sector in the next 2 years. Overall, the Canadian central bank appears more optimistic about the sustainability of the recovery that is happening around the world, although it also cautions that risk of a stall in recovery remain. “The global economic recovery is under way,” Bank of Canada governor Mark Carney said “Economic and financial developments have been slightly more favourable than initially projected and the outlook for the global economic growth through 2010 and 2011 is somewhat stronger.” He also stated that “this recovery is still expected to be more subdued than usual.”
In the United States stocks suffered their worst 1-day percentage drop since October as U.S. President Barack Obama proposed tough restrictions on banks that would squeeze profits, their growth, activities and their ultimate size. Obama said banks should no longer be allowed to own, sponsor or invest in hedge funds for proprietary profit. Proprietary trading (when a firm uses its own money to make bets on markets) which has contributed to the earnings for some major banks. In short, bank profits will be hurt and when profits are hurt share prices drop.
Obama (a Democrat) is struggling to advance his “agenda” after a key election loss this week, laid out rules to restrict some banks’ most profitable operations, which he blamed for helping to cause the financial crisis. “If these folks want a fight, it’s a fight I’m ready to have,” Obama said. “We should no longer allow banks to stray too far from their central mission of serving their customers,” he said. After a mixed 1st year as president, Obama took a tough stance aimed at improving his political base by exploiting voter anger over Wall Street (voters see Wall Street being bailed out by Main Street while Wall Street gets all the bonuses and Main Street is expected to be content with high unemployment).
Obama’s move is the latest in a series to crack down on banks and follows a bad political loss for his party in Massachusetts, when a Republican captured a U.S. Senate seat formerly held by the late Democratic Senator Edward Kennedy, potentially impeding his platform. Underscoring the high level of public anger at banks, a majority of Americans surveyed in a Thomson Reuters/Ipsos poll said executive pay was too high.
The proposals must receive congressional approval (but the revenge tax will likely stick). The financial sector was down 2.7% (led by some of the biggest banks that received the most support) while energy and materials were not far behind.
The Dow Jones industrial average fell 213.27 points, or 2.01% to end at 10,389.88, the Standard & Poor’s 500 Index was down 21.56 points, or 1.89%, at 1,116.48 and the Nasdaq Composite Index was down 25.55 points, or 1.12%, at 2,265.70. The Dow had its worst 2-day percentage decline since June, while the Dow and S&P 500 had their worst 1-day percentage losses since late October. It was the 2nd straight day of big losses for stocks, with the U.S. stock market falling from 15-month highs on worries that China is reducing their stimulus (trying to get their economy to slow down or reduce demand/consumption).
Stocks were also hurt by the fact that the number of U.S. workers newly applying for unemployment benefits unexpectedly rose last week and regional manufacturing slipped in January, hinting at some slowing in the pace of economic recovery. The recovery of the U.S. economy continues, but it’s at a slower pace than we have seen at the end of 2009. The biggest problem is companies remain reluctant to expand their capacities.
European stocks are down this morning with financials leading the way. Futures on the S&P 500 are down marginally this morning and have extended yesterday’s 1.9% drop after Obama announced the bank proposals. The Dow Jones Industrial Average yesterday erased its gains for 2010. The biggest stock market rally since the Great Depression boosted the S&P 500’s price-earnings multiple to 25 last week from 10.1 in March of 2009 when markets hit their most recent “bottom”, the lowest in a quarter-century, data compiled by Bloomberg shows. Analysts say earnings at financial companies rose 120% in the 4th quarter.
In short, things will be a little volatile in the short-term as investors digest all this new news impacting stock markets but one thing is very clear. The economy is improving, although still fragile and with some more time things will continue on the upswing.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
