Canada’s main stock index ended lower on Friday as weaker than expected Gross Domestic Product (GDP) data fueled investor fears about a slow recovery. In turn, influential energy and financial shares led declines after U.S. growth slowed in the 2nd quarter, adding to anxiety about the longer-term outlook.
The Toronto Stock Exchange’s S&P/TSX composite index finished the day down 15.21 points, or 0.13%, at 11,713.43 while the index was unchanged for the week. Investors were reluctant to make big bets ahead of a holiday weekend; the S&P/TSX was closed yesterday for the Civic Holiday. July was the best single month for the market in about a year posting more than a 3% gain for the month.
Wall Street marks its best month in a year in July. Stocks in the United States closed little changed on Friday but Wall Street wrapped up its best month in a year after the earnings season rounded the final turn with a group of strong results that offset the impact of poor economic data. While the major indexes in the United States each posted 7% gains for the month, it came during low volume and followed a combined decline of nearly 14% for May and June.
The conflict between strong earnings and lackluster economic news has held stocks in a tight range throughout July. As mentioned 2nd quarter GDP data disappointed investors U.S. GDP expanded at a 2.4% annual rate in the 2nd quarter, after an upwardly revised 3.7% gain in the January-March quarter (1st quarter). That was just below the 2.5% 2nd quarter forecast. U.S. consumer sentiment plunged in July to its lowest level since November on bleak prospects for jobs and income a year since the economic recovery began, according to the Thomson Reuters/University of Michigan’s Surveys of Consumers.
The global purchasing managers’ indexes (ISM) at the start of this week will give investors a better idea about the direction of the economy and could be a catalyst for markets. The stock market has had nice bounce from recent lows but has stalled out recently. On the surface the corporate earnings are exceeding expectations and have been pretty strong, but underneath or within the economy there was a loss of momentum as growth has subsided.
For July the Dow rose 7.1%, the S&P 500 gained 6.9% and the Nasdaq added 6.9%. The Dow Jones industrial average ended the week at 10,465.94, the Standard & Poor’s 500 Index ended the week at 1,101.58 and the Nasdaq Composite Index ended the week at 2,254.70. For the week, the Dow rose 0.4%, the S&P 500 lost 0.1% and the Nasdaq dropped 0.7%.
This week Canadian earnings, U.S. jobs numbers should motivate North American stock markets. A lot of Canadian companies will announce earnings in a shortened trading week and are expected to provide the stock market with direction, while attention will also be focused on key economic data, including jobs numbers and the revealing of RIM’s ‘iphone killer’. This Friday investors will be tuned to U.S. jobs numbers in particular, because it’s considered key to building further momentum for a sustainable global economic recovery. Unlike previous economic recoveries employment has not recovered, if it had recovered we would have had the income growth needed to raise the savings rate, cover tax hikes/cut government deficits and have something left over for spending or consumption. At this time we have not seen much of a employment recovery.
Analysts estimate U.S. non-farm payrolls to slide by about 60,000, which would keep the unemployment rate steady at 9.5% in the United States. The Canadian labour force survey is scheduled for Friday, with average market estimates predict 15,000 new jobs will be added, which would keep the unemployment rate steady at 7.9%.
Yesterday (Civic Holiday in Canada) global stock markets rallied strongly after better-than-expected manufacturing surveys in Europe and the U.S. revitalized hopes about the global economy at the start of a busy week of economic news. Strong earnings from 2 of Europe’s biggest banks also helped to maintain the optimistic mood.
Optimism about the global economy was reflected in investors embracing riskier investments. In Europe, many indices were up by more than 2.5% and indices in the United States were up by more than 2%. The optimistic mood kicked off in Europe, when the monthly manufacturing purchasing managers’ index for the 16 countries that use the Euro; a closely watched gauge of business activity, was revised up to 56.7 in July from the previous estimate of 56.5. Anything above 50 means the sector is expanding. That is another indication the Euro zone economy is recovering far more strongly than most investors had thought earlier this year when the government debt crisis was threatening the single currency zone.
An equivalent survey in the U.S. also pointed to stronger-than-anticipated growth in the manufacturing sector. Although the Institute for Supply Management (ISM) said its manufacturing index slipped to 55.5 in July from 56.2 in June, indicating that growth had slowed, it was higher than the expected decline to 54.1. The employment component within the survey was particularly strong, increasing hopes that a double dip recession is unlikely and that this Friday’s U.S. non-farm payrolls data for July may surprise on the upside.
Earlier in Asia, stocks rose after weaker Chinese manufacturing data quelled fears that Beijing might tighten controls to prevent overheating and upbeat Japanese earnings boosted trading sentiment. There is no danger of overheating, which means the government will not have to tighten monetary policy.
Oil prices pushed back above the $80 a barrel as hopes over the global economic recovery gains further traction.
As mentioned in the July Vos Corner we can see stocks are attractively positioned for some short-term success. I would not expect a significant move on the upside in the short-term rather I would expect a progressively but stubbornly slow move to the upside spiked with periods of above average volatility. The ‘risk spread’ of owning risk free assets versus risky assets is relatively large based on historical norms and there is a lot of cash sitting in risk free assets that will eventually move back into riskier assets in search for yield or higher returns.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
