Index Daily Change
S&P/TSX composite index 0.04% Drop
Dow Jones industrial average 0.89% Gain
Standard & Poor’s 500 Index 0.97% Gain
Nasdaq Composite Index 1.01% Gain
Toronto’s main stock market index ended slightly lower yesterday, as lower gold prices dragged down miners and weaker than expected corporate results have also had a negative impact. Disappointing results from several companies, including TransAlta and Finning International outweighed comments from Federal Reserve Chairman Ben Bernanke’s reiterating his commitment to keeping U.S. interest rates low.
An unexpected drop in new U.S. home sales also underscored concerns about the fragile U.S. economic recovery, which helped to pull down the price of gold below $1,100 an ounce. Although, oil, was up on the day, above $80 a barrel, energy shares stayed negative with the oval market. The overall market was down for a 3rd straight day after an 8 day run.
The big banks in Canada were mixed ahead of the kickoff of their quarterly earnings reports today. While the economic slump may be over, the nation’s top lenders could report their biggest consumer credit losses of the current cycle, taking a bit of shine off their still-huge profits.
In the United States Federal Reserve Chairman Ben Bernanke reassured government officials interest rates will remain low, driving stocks higher as investors welcomed the promise of more “cheap money”. Investors overlooked a 47-year-low in the pace of new home sales and the generally somber tone taken by Bernanke on the economy. In short, although we are not going to see robust economic growth and unemployment will be high, it is going to generate a low interest rate environment for a long time.
Despite the gains, the major indexes are still negative for the week, the largest decline in nearly 3 weeks for the stock market.
Ben Bernanke told Congress a weak job market and tame inflation warrant low interest rates for “an extended period,” curbing speculation the central bank was moving closer to raising borrowing costs. In his first appearance before Congress following a testy confirmation vote in the Senate last month, Bernanke offered a relatively somber assessment of the U.S. economy despite recent signs of strong growth. The U.S. has lost 8.4 million jobs in just over 2 years in the most severe economic downturn since the Great Depression. The Fed chief said job losses were abating, but acknowledged the recession’s toll on American workers.
“Notwithstanding the positive signs, the job market remains quite weak,” Bernanke said. “The FOMC continues to anticipate that 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 (what consumers and business pay) for an extended period,” he also said. The Fed last week surprised markets by increasing the discount rate (what banks pay) it charges on direct emergency loans to banks. The move spurred fears the central bank was about to embark on a broader push for higher borrowing costs.
A report on new home sales on Wednesday highlighted the Fed’s predicament. Sales slumped more than 11% to a record low, suggesting the sector at the epicenter of the financial crisis had yet to fully heal. The U.S. Commerce Department said sales of newly built single-family homes dropped to an annual rate of 309,000 units, the lowest level since records started in 1963, from 348,000 units in December.
This morning Moody’s Investors Service and Standard & Poor’s (both credit rating agencies) said they may cut Greece’s rating. The MSCI World Index of 23 developed nations’ stocks fell 0.4% and futures on the Standard & Poor’s 500 Index declined 0.5%. The warnings by Moody’s and S&P rattled investors based on concerns that Greece’s fiscal woes may spread to other nations in the Euro zone. Ben S. Bernanke testifies to Congress today after saying yesterday that the U.S. economy is in a “nascent” recovery and requires low interest rates to stoke demand.
The outlook for a good recovery remains relatively robust as things appear to have either bottomed out or close to bottoming out. It is very helpful to have a very low interest rate policy for an extended period of time but both high unemployment and high budget deficits will provide some headwinds and ultimately reduce overall economic growth rates. This should be offset by good corporate profits and reasonable valuations (valuations are neither cheap nor expensive).
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
