Canada’s stock market posted its steepest 1 day gain in just over 10 weeks on Friday, led by strong resource and financial issues, after Federal Reserve Chairman Ben Bernanke said the U.S. central bank was ready to take further steps to aid the recovery. Bernanke downplayed concerns that the United States might slip back into recession.
The TSX index climbed sharply, led by its 3 main sectors: energy, financials and materials. The resource-laden market was also supported by strong oil & base metal prices. The Toronto Stock Exchange’s S&P/TSX composite index finished the day up 226.54 points, or 1.94 percent, at 11,879.72, with all of its 10 main sectors higher. It was the steepest 1 day percentage gain for the index since June 15th, on the week the market rose 1.3%. The index could test the April high of around 12,300 heading into the volatile fall.
The big issue that has been weighing on markets recently has been the thesis that the U.S. economy will grow very slowly, or even enter into a double-dip recession, however, the Fed comments suggest that they will keep a loose monetary policy as long as they need to and as aggressively as they need to. This encouraged investors.
In the United States stocks rebounded to post their best gains in nearly 4 weeks on Friday, overcoming initial skittishness brought on by a revenue warning from Intel and dour comments from Federal Reserve Chairman Ben Bernanke. Strong buying interest at a key technical level and short-covering sparked the market’s comeback, and the tone improved as investors took a more positive view of Bernanke’s comments about the economy and the Fed’s readiness to act.
Intel briefly helped take indexes lower after the chipmaker warned 3rd quarter revenue could fall short of its own estimates by more than $1 billion. But its shares finished up 1.1% at $18.37 after losing more than 15 % since late July. Even though the news of the revenue short-fall is bad, the bad news is already in the valuation. This is true for a lot of stocks.
The Dow Jones industrial average gained 164.84 points, or 1.65%, to 10,150.65, the Standard & Poor’s 500 Index jumped 17.37 points, or 1.66%, to 1,064.59 and the Nasdaq Composite Index climbed 34.94 points, or 1.65%, to 2,153.63. Nonetheless, the Dow and S&P 500 posted their 3rd week of declines in a row. For the week, the Dow was down 0.6%, the S&P lost 0.7%, while the Nasdaq gave up 1.2%.
The stock market started on a positive note after U.S. economic growth was revised down in the 2nd quarter, but still the reading was better than expected. The debate over whether the economic recovery has hit a soft patch or is headed for a double-dip recession has plagued the market. Although the data pointed to an even softer performance in the 3rd quarter, investors were relieved that the reading was not as bad as feared.
As mentioned, U.S. Federal Reserve Chairman Ben Bernanke said on Friday the economic recovery has weakened more than expected and the Fed stands ready to act if needed to spur slowing growth. Bernanke downplayed concerns that the economy might slip back into recession, predicting a modest expansion in the 2nd half of this year, with the pace picking up in 2011.
If that forecast proves overly optimistic, however, he said the Fed has sufficient ammunition left and could support growth by purchasing more government debt or by promising to keep rates exceptionally low for a longer period. “The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” Bernanke told a Fed conference, held in Jackson Hole, Wyoming.
The hopes for a speedy U.S. recovery have been hurt by a series of disappointing reports on employment, housing and manufacturing. Economists have slashed 3rd quarter growth forecasts in the past couple of weeks and now see the change of a double-dip recession at 25%, up from 15% in early July, according to a Reuters poll on Friday (prior to the Fed comments). Bernanke stressed that the high jobless rate remains a concern to policy makers, and said the Fed would be vigilant against deflation (a dangerous downward spiral in prices that hurts economic growth by making both businesses and consumers reluctant to make purchases). “Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability,” he said.
September has historically a weak month for stocks, facing key reports on jobs, manufacturing and services, if those reports disappoint, the S&P 500 could breach technical support levels and push stocks lower. The S&P 500 index has fallen nearly 13% since April as investors fret about the chance of a double-dip recession. However, the index has rebounded somewhat and found a solid support around the 1,040 level, with a sustained move below that proving tough.
The non-farm payroll report coming on Friday is expected to show 99,000 jobs were lost in August, while private sector hires grew by only 42,000. Both the manufacturing and services sectors are expected to have experienced another slowdown in growth in August. The ISM manufacturing report is released on Wednesday, followed by the services sector report on Friday.
The S&P 500 tested the 1,040 level twice during the past week, both times ending the day with gains. The level has consistently attracted buyers over the past 10 months and was significantly breached only once during a brief stint in July. There are significant risks on the horizon as the stock market is locked into short-term thinking. However, it is clear that at some point the global economy will get through this and if the global economy gets through stock price valuations are very reasonable.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
