Canada’s main stock market edged out a small gain on Friday but it was a gain nonetheless as bargain-hunters scooped up stocks seen as undervalued and the index’s heavily weighted resource sectors trimmed losses brought on by concerns about China’s monetary policy.
The TSX rebounded late in the session after falling nearly 100 points. China’s decision to increase bank reserve requirements raised worries about the move’s impact on global growth. There is a tremendous amount of cash sitting on the sidelines and any time the stock prices come down the cash has come in to support stock prices.
The Toronto Stock Exchange’s S&P/TSX composite index finished up 0.3%, heading into a long weekend with market holidays in Canada and the United States yesterday. Regardless of what happens in China or Greece over the short term there are plenty of undervalued companies that investors are buying. The rise in stocks marked the 4th straight daily gain, which notched its highest close in 3 weeks. The index rose 2.2% for the week.
In the United States the Dow and S&P 500 dipped on Friday as China’s move to curb bank lending and U.S. and European economic data raised fears the global recovery might be in jeopardy. Even so, Wall Street stocks ended off the day’s lows as investors bet the European Union would come up with a clearly defined plan to aid debt-laden Greece and restore confidence in countries using the Euro.
Stock laggards included large manufacturers and commodity-related companies, many dependent on Chinese demand. On the Nasdaq, bargain-hunting in technology helped the index to end slightly higher. Stock markets also fell on weaker-than-expected data on U.S. consumer sentiment and business inventories and on Euro zone Gross Domestic Product (GDP). Worries over high unemployment eroded consumer sentiment early this month. The Reuters/University of Michigan Surveys of Consumers said its preliminary index of sentiment for February was 73.7, below analysts’ expectation of 75.0.
An increase in banks’ reserve requirements by China marked the 2nd such rise within the last 2 months. Investors worried China, which has been spearheading the world’s economic recovery, might be pulling back too soon. Although investors had been expecting the People’s Bank of China to push the reserve requirement ratio higher after an increase last month, few thought the second rise would come so soon. Markets were rattled by fears that monetary tightening in the world’s third-largest economy would be more aggressive than had been reckoned on, potentially denting global growth.
The Dow Jones industrial average dropped 0.44%, the Standard & Poor’s 500 Index dropped 0.27% but the Nasdaq Composite Index rose 0.28%. Stock indexes ended the week higher, halting a 4-week string of declines, thanks in part to investors scouring for shares in the beaten-down sectors, particularly technology. Both the Dow and the S&P 500 rose 0.9% while the Nasdaq climbed 2%.
Yesterday European stock markets advanced ahead of a meeting of Eurozone finance ministers in Brussels, where the Greek debt crisis will likely top the agenda. Though EU leaders have given Greece some vocal support, no money or guarantee has been offered, primarily because of German unwillingness to stump up any cash as it could undermine German bonds and put pressure on the Euro. Instead, all agreed that Greece’s progress in bringing down its budget deficit will be closely monitored and it would not be allowed to threaten the Eurozone. Stock markets interpreted the latter comment as an implicit guarantee that Eurozone policymakers will help the country if its own efforts fail.
This morning world stock markets mostly rose after strong earnings from British bank Barclays PLC and ahead of Wall Street’s open following a public holiday in the U.S. and in Canada yesterday. Commodity prices are also moving ahead this morning. You can see that stock investors are fearful because: 1) stocks have had great run; 2) sovereign debt issues; 3) pull back of stimulus in countries like China; and 4) the economy is still fragile due to high unemployment and U.S. residential housing. This is offset by: 1) a lot of cash on the side lines; and 2) reasonable stock valuations (see below).
In turn, a well diversified portfolio of investments should do well during the next 10 years.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
