Canada’s main stock market slid to its lowest point in 6 weeks on Friday, due to falling oil prices and by a weaker financial sector that were both still hurting from the White House plan to impose tighter restrictions on U.S. banks. Stock markets are going to go through a period of uncertainty associated with the development of new financial policy in the United States. In addition, there are fears that recent bank lending cuts in China could slash demand for commodities and hamper the global economic recovery.
The Toronto Stock Exchange’s S&P/TSX composite index closed lower for a 3rd straight day down 125.67 points, or 1.1%, at 11,343.43. All 10 of the index’s main sectors were lower. The TSX index had dropped 2.9% on the week, its 2nd consecutive weekly decline. Last week’s fall stemmed from fresh evidence of tightening credit policy in China, which brought up fears that it could cool the economy seen as the world’s key growth engine. Since China has led the nascent global economic recovery, any cuts it puts on lending threatens to slow demand that other economies rely on to spur their own growth.
In the United States stocks capped their worst 3-day slide in 10 months on Friday on based on fears the White House’s plan to curb bank risk-taking would cut profits. Tech shares also slumped after Google’s disappointing results. Uncertainty about the Senate’s confirmation of Ben Bernanke for another term as the Federal Reserve’s chairman also made investors nervous in a week when political squabbles helped erase stocks’ gains for 2010.
Since the Democrats lost their 60-vote hold in the Senate with the election of a Republican in Massachusetts last Tuesday, there is a growing sense among investors that political uncertainty has all but ended the rally that began in March of last year.
The Dow Jones industrial average dropped 216.90 points, or 2.09%, to 10,172.98, the Standard & Poor’s 500 Index slid 24.72 points, or 2.21%, to 1,091.76 and the Nasdaq Composite Index fell 60.41 points, or 2.67%, to 2,205.29. For the week, the Dow dropped 4.1%, the S&P 500 lost 3.9% and the Nasdaq tumbled 3.6%. It was the worst week for the S&P 500 and Nasdaq since October and the worst week for the Dow since March. The Dow and the S&P 500 are now off more than 2% year-to-date, while the Nasdaq has shed almost 3%. The selling of the past 3 days left the market’s technical picture looking bleak after major indexes sunk below key support levels and their 50-day moving averages, a move considered a bearish signal. In another sign of how rattled investors were, the Chicago Board of Options Exchange (CBOE) Volatility index, a measure of Wall Street’s sentiment, registered its biggest 3-day rise in nearly 3 years, increasing 55.4% to almost 30.
U.S. President Barack Obama unveiled his bank proposals on Thursday, saying banks should no longer be allowed to own, sponsor or invest in hedge funds for proprietary profit. Proprietary trading is when a firm uses its own money to make bets on markets and this has been a profit engine for some major banks. The proposals must receive congressional approval.
More U.S. investors believe the stock market is poised to rise in the year ahead, more than any time in the past 2 years, a survey showed last week. The probability of further gains in stocks, even after the big run up from its lows last March, was judged as more likely in January than any time since the end of 2007, data from the Reuters/University of Michigan Surveys of Consumers indicated.
Although, the sharp slide in U.S. stocks last week could mean more trouble for Wall Street this week as investors worry if the recent rally is sustainable. The banking policy issues and China cutting lending will carry into this week. In addition, the sectors that led the stock market advance are taking the most recent hit. Although, companies are reporting some good 4th quarter earnings their stock prices are still getting hit. So without leadership, analysts see the stock market as more vulnerable, particularly with the pace of earnings announcements set to accelerate in the coming weeks and the risk of disappointments set to rise.
It is interesting to note that nearly every apparent correction since last July has proven to be short-lived, with buyers quickly coming in to bid beaten-down shares higher. Will this be the start of a 10% correction? We are almost halfway there! I don’t think we have sufficient evidence to conclude that at this time but many corporations are providing a bleaker 2010 outlook than what investors were initially hoping for.
Of 62 companies in the S&P 500 that reported earnings, 46 were better than the average analyst estimate, according to data compiled by Bloomberg. A record 9-quarter earnings slump is projected to have ended in the 4th quarter with a 73% increase in S&P 500 profits. More than 130 companies in the index are scheduled to release results this week, including Apple Inc., 3M Co. and Microsoft Corp. The S&P 500 still is up more than 60% from a 12-year low last March, with a valuation of about 14.2 times the combined operating earnings forecast for its companies this year.
This morning things will remain a little mixed with oil prices down, gold up and European shares down but North American futures are up. Things will remain a little directionless for the near-term but with a lot of news coming out this week and with positive earnings and economic developments stock prices should find some support in the medium to long-term.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
