Canada’s main stock index fell for a 2nd day yesterday, knocked down by weak U.S. consumer confidence data that cast doubt on the strength of the economic recovery in the largest economy in the world. U.S. consumer confidence fell to a 10-month low in February, which concerned investors as the economic recovery is fragile at best. Earlier in the day data showed U.S. home prices dipped unexpectedly in December which made for a bad combination.
Decliners were led by the big 3 sectors, financials, oil & gas and materials. The 3 sectors collectively account for about 3/4ths of the index’s total weighting. These sectors also led the recent 8-day run of gains.
The U.S. data helped to weaken key commodity prices, which pressured the materials and oil & gas sectors, and led both sectors down sharply as oil broke a 5-day rally to drop below $79 a barrel while gold also lost ground. The Toronto Stock Exchange’s S&P/TSX composite index ended down 0.93%.
The Canadian dollar also fell against the U.S. dollar, dragged down by lower commodity prices and rising risk aversion after data cast doubt on the strength of the U.S. economic recovery. There are also concerns regarding what is going on in China and with the sovereign debt issues in the Eurozone.
In the United States stocks suffered their biggest 1-day decline in nearly 3 weeks after a sharp drop in consumer confidence heightened worries over one of the most vulnerable areas of the economy. There is growing disenchantment with the way the U.S. government has been handling the problems. This is not only regarding the growing budget deficit, but their inability to get the job growth started again. The Conference Board said its index of consumer attitudes fell to 46.0 in February, the lowest since April last year and down from 56.5 in January.
In short, investors are adjusting their expectations down as it pertains to short-term economic growth. The weak economic data added to the cautious tone held by investors before congressional testimony from Federal Reserve Chairman Ben Bernanke on interest rate policy beginning today.
The Dow Jones industrial average slipped 0.97%, the Standard & Poor’s 500 Index dropped 1.21% and the Nasdaq Composite Index was off 1.28%.
Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was “extremely unbalanced,” driven largely by high earners benefiting from recovering stock markets and large corporations. Small businesses and the jobless are still suffering from the aftermath of a credit crunch.
Greenspan did see signs pointing toward a modest recovery in job creation, saying that staffing levels at U.S. firms, which were deeply cut, remain below what is sustainable in the long run. But the unemployment rate could still remain stubbornly high.
This morning European stocks are up slightly and North American futures and commodity prices are pretty flat. Investors will await Federal Reserve Chairman Ben S. Bernanke’s congressional testimony later today.
Outlook for the near-term will remain a little cloudy as investors await further developments regarding some of the sovereign debt issues and China works to constrain economic growth. In addition, the budget deficit in the United States and the current jobless recovery starts to provide some new but nominal headwinds for the stock market. It is becoming very clear that governments around the world are starting to reduce their stimulus, increase their taxes and constrain budgets which will ultimately reduce economic growth by a material amount. Interest rates are expected to go up but the yield curve (the difference between 1 year yields and 10 years yields) is very steep thus, current bond investors are expecting some big increases in bond yields in the next 2 to 3 years. In short, higher interest rates are already priced into the bond or fixed income market, if interest rates move higher then their current expectations then bond markets will decline.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
