Canada’s main stock index fell more than 2% on Friday, following disappointing May jobs figures in the United States and worries that Hungary may be the latest casualty of Europe’s fiscal woes. In short, sovereign debt fears and issues are rising and spreading.
The weak U.S. employment report coupled with a Hungarian official warning of a “Greek-style” debt crisis also dragged on the euro, which fell below $1.20 for the 1st time in more than 4 years.
Investors don’t like what is happening in Europe, they wanted to see more strength in jobs and they really don’t like the general uncertainty in the stock market. Hiring by U.S. private employers slowed sharply in May, a setback for the economy’s recovery in Canada’s biggest trading partner. Investors were optimistic that there would be some strong private sector job growth in the United States. The U.S. Labor Department said the U.S. economy added 431,000 jobs in May far short of the 513,000 that Wall Street had expected. The unemployment rate dropped to 9.7% in May from 9.9% in April. However, only about 10% of those jobs were created from the private sector the residual came from government hiring and the majority of those hires were part time. Analysts said it didn’t alter their view that the economy is stabilizing, although gradually, with many expecting unemployment will remain high for some time.
In short, this is confirmation that there is a V-shaped type recovery, but are in a below- average recovery and we should see a sustainable expansion, but a below average expansion. Said differently, we have a long way to go although, things are likely not going to get worse on the economic front by a material amount.
The Toronto Stock Exchange’s S&P/TSX composite index closed down 242.26 points, or 2.05%, at 11,569.61 with all 10 of its main groups lower. The index was off 0.9% for the week.
Global growth concerns overshadowed a rosier domestic employment report that showed Canada added almost double the number of jobs expected in May at 25,000. The impressive domestic data prompted analysts to predict the Bank of Canada would come under more pressure to raise interest rates again next month, despite the rocky global landscape. Although, it does not appear that other Central Banks will follow anytime soon.
In the United States stocks cascaded to their lowest close since February on Friday after May’s jobs figure hit investors already hurting from worry over another developing debt crisis in Hungary. Wall Street, which is down 12.5% since the April 23rd closing high for the year, the sell-off was led by economically sensitive sectors, including industrials, technology and small-caps, on concerns that the economy will recover by fits and starts.
The Dow Jones industrial average dropped 323.31 points, or 3.15%, to 9,931.97, the Standard & Poor’s 500 Index dropped 37.95 points, or 3.44%, to 1,064.88 and the Nasdaq Composite Index dropped 83.86 points, or 3.64%, to 2,219.17. The Chicago Board of Options Exchange (CBOE) Volatility Index or VIX, Wall Street’s key measure of investor fear, jumped 20.43% to 35.48. For the week, the Dow lost 2%, the S&P 500 fell 2.3%, and the Nasdaq shed 1.7%.
The S&P 500 fell below 1,070, which had been considered a support level for the market. The index closed just below the intraday low the market reached during the so-called “flash crash” on May 6th.
This week U.S. stocks could face further pressure unless investors get some relief from worries about Europe, jobs and the toll they might take on the economic recovery. At some point things will need to bottom out. Reports on retail sales and consumer sentiment, both of which should offer clues on the outlook for spending, are among this week’s major economic indicators.
The impact of BP’s massive Gulf Coast oil spill on the environment and the energy industry also is likely to stay in focus, with moves to contain the spill so far having failed. Although, containment efforts appear to be gaining some traction (this will take months if not years to fully resolve itself).
Stocks will await further direction from Europe before making any major move either up or down.
Outlook
No one said 2010 was going to be an easy year in the stock markets and for economic growth worldwide. The bad U.S. stock market performance in May, the worst in 15 months, is the latest evidence of a difficult year that started with cautious optimism for investors trying to navigate the economic recovery, sovereign debt crisis and policy reforms.
Negative news, especially from the euro zone combined with stock market drops and the gloomy pictures streaming from the ecological disaster in the Gulf of Mexico has created a significant level of uncertainty. Twice in May, the VIX index spiked above 40 before quickly retreating, indicating high levels of uncertainty amongst investors.
One ‘silver lining’ has been corporate profits, which have been a bullish, are in general up more than 30% from last years profits (which were low). Only 6 times since 1950 have corporate profits risen by more than 30% or faster year-over-year and each of these periods we have seen real Gross Domestic Product (GDP or the level of economic activity) growth of at least 3% in the following year and by job growth of 1.9% or better.
The road ahead will likely not be much smoother than what we have experienced during the previous 6 months in stock markets.
This morning stock index futures were slightly higher, reversing sharp declines from last week, as solid German data eased concerns about a wobbly European economy and the S&P looked to bounce off a key technical level. German industrial orders jumped far more than expected in April, adding to signs that Europe’s largest economy was on the path to durable growth helped by a lower euro currency.
BP gained 4.1% in premarket trade after the company said it was capturing most of the oil gushing from its gushing Gulf of Mexico well, and that an additional capture system would be ready in mid-June.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
