On Friday the Canadian stock market hit its lowest level in more than 4 months as resource issues, particularly gold miners, stumbled heavily to start the 3rd quarter of the year. Gold shares were hurting after prices were hit hard on Thursday, when Canadian markets were closed for Canada day. The index’s materials sector, which includes golds, was down more than 3% to lead declines.

Mining issues failed to get a lift from news that Australia dumped its proposed “super profits” tax on the sector in favour of a lower resource rent tax.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 98.36 points, or 0.87%, at 11,196.06. The decline gave the index a weak start to the second half of the year after losing more than 6% in the 2nd quarter, the largest share in the past few weeks. The stock market was off 4.4% in the holiday shortened week.

A report that showed U.S. employment fell in June, the 1st monthly drop this year, added to worries that the global economic recovery was failing to gain traction. You are seeing more and more discussion about the risk of a double dip recession.

In the United States, Wall St. fell on Friday to close out the worst week in 2 months as disappointing jobs data joined other recent evidence pointing to a tepid economic recovery. Adding to stocks’ weaker tone was a technical move that indicated more selling pressure may be ahead. The S&P 500’s 50-day moving average broke below its 200-day moving average, a break known as the “death cross.” According to technical analysts, a “death cross” occurs when a shorter-term average falls below a longer-term average. The phenomenon last occurred between the 50- and 200-day moving averages in December 2007, soon after the market began a decline that eventually took the S&P 500 to 12-year lows.

As mentioned, the Non-farm payrolls fell in June for the 1st time this year, adding to a slew of economic reports signaling the U.S. recovery is slowing. In short, it is not really possible to be bullish about the jobs report. The Labor Department reported non-farm payrolls dropped by 125,000, the largest decline since October and affected by the loss of temporary government census jobs.

The unemployment rate fell to 9.5%, the lowest level since July, but only because a flood of jobless workers gave up their employment search. Private hiring rose 83,000, the department said, up from the previous month. Other weak data on Friday came in new orders for U.S. factories, which showed the sharpest drop since the depth of the recession and the 1st decline in 9 months.

Financials and economically sensitive sectors were the biggest decliners. The S&P 500 financial index dropped 1.1%, while consumer discretionary stocks were down 1.2%.

The Dow Jones industrial average dropped 46.05 points, or 0.47%, to 9,686.48. The Standard & Poor’s 500 Index lost 4.79 points, or 0.47%, to 1,022.58. The Nasdaq Composite Index fell 9.57 points, or 0.46%, to 2,091.79. Earlier in the week, the S&P fell below the 1,040 level, viewed by many analysts as a critical support level which it had successfully held several times in the past 5 months. For the week, the Dow fell 4.5%, the S&P lost 5% and the Nasdaq shed 5.9%.

This morning global stock prices fell for the 4th day running on growing concerns of slowdowns in the United States and China, the 2 main pillars of global growth. Trading was expected to be light on Monday because of the U.S. Independence Day holiday.

World stocks measured by MSCI All-Country World Index dropped by 0.1% lower after 3 consecutive days of declines. The index has lost 16% since mid-April, and is down 11% for the year (in local currency). The index carried a 1-year forward price-to-earnings (P/E) ratio of 11.9, a level last seen in April 2009 and well below its 10-year average of 15.42, according to Thomson Reuters DataStream.

French Economy Minister Christine Lagarde said that stress test results to be published on July 23rd will show that “banks in Europe are solid and healthy.” The bank stress test published in April 2009 in the United States was a key catalyst to rebuilding trust at that time. However, there is a certain amount of skepticism that the stress tests (on banks) will either be fudged or the complete results won’t be published. In turn, investors may still not receive the required level of clarity that they need to push stocks back up.

So what is the outlook?

The “death cross” is a bit of a concern from a technical perspective but valuations are becoming significantly more attractive as a result of the current short-term sell-off in stock prices. You still need job growth which will take time but at the same time it is hard to determine what catalyst would cause stock markets to drop a further 5% to 10% unless we have a 2nd great recession. A 2nd great recession will materialize in the event that we have a collapse in the credit/financial markets again. Given the yield on corporate bonds and the current default rates it is unlikely that we will endure a 2nd great recession but the risk is not zero. In the short-term is hard to see a catalyst that will justify a significant move on the upside conversely, it will also be hard to justify a big increase in interest rates in the short-term.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner