Canada’s stock market inched higher last Friday advancing for an 8th straight day as a stronger than expected U.S. employment report eased fears about a slow global economic recovery. Data showed U.S. nonfarm employment fell less than forecast in August, while private payrolls growth was higher than expected.
Financials which are highly correlated to the health of the economy led all sectors with a 1.3% advance. Job numbers in the United States were better than expected; not great, but still better. The Toronto Stock Exchange’s S&P/TSX composite index finished the session up 33.83 points, or 0.28%, at 12,144.92. Earlier, the index hit 12,197.89, its highest level since May 13th of this year. The index rose 2% on the week, its strongest showing since early July.
Wall Street closed a great week on Friday after recent economic data, including a stronger than expected employment report, bolstered optimism that the economy would not fall back into recession. The S&P 500 gained 3.8% for the week, its best in 8 weeks, setting the stage for a more bullish mood amongst investors. Stock sectors sensitive to economic volatility like technology and banks led the week’s gains. The Dow Jones industrial average shot up 127.83 points, or 1.24%, to 10,447.93, marking a move “back into the black” for the year. The Standard & Poor’s 500 Index gained 14.41 points, or 1.32%, to 1,104.51. The Nasdaq Composite Index rose 33.74%, or 1.53%, to 2,233.75.
The S&P 500 closed above 1,100 for the first time since August 10. Momentum measures, including the moving average convergence-divergence, indicate the benchmark is poised for more gains. But the upward move faces strong resistance, with the 200-day moving average near 1,116. Stocks sold off sharply through August on concerns the U.S. economy could be headed for a double-dip recession. But a report that showed the manufacturing sector grew more than expected last month sparked a rally on Wednesday that lifted stocks to their best day in eight weeks. In addition to the S&P 500’s sharp weekly percentage gain, the Dow rose 2.9% for the week and the Nasdaq advanced 3.7%. Equities rose last week for the first time in a month as U.S. and Chinese manufacturing increased more than estimated
U.S. employment fell for a 3rd straight month in August, but the drop was far less than expected and private hiring was a positive surprise, relieving concerns about a stalling economic recovery. Nonfarm payrolls fell 54,000 as jobs were lost in the government sector, and the unemployment rate edged back up to 9.6%, but the private sector, considered a better gauge of employment market health, added 67,000 jobs, according to U.S. Labor Department on Friday. Economists had forecast a loss of about 100,000 jobs, along with a rise of about 41,000 in private sector payrolls.
The recovery may be wobbly but it is still staggering forward. The data did little to take the political pressure off President Barack Obama over the state of the economy though, or improve the Democratic Party’s chances in November’s mid-term congressional elections. Obama said his administration would announce new measures next week to help the economy. The data also suggested corporate America may be beginning to take on workers again after an initial burst of hiring and production last year to restock shelves left bare during the deepest recession in generations. While the average workweek was unchanged at 34.2 hours, hourly earnings rose by 6 cents, which analysts said bodes well for consumer spending. There was also a glimmer of hope for the long-term unemployed. The number of people out of work for 27 weeks and more fell by 323,000 last month to 6.2 million but there are still more than 14 million people out of work in the United States.
The scarcity of jobs has hurt consumer spending, which normally accounts for about 66% of U.S. economic activity, and left recovery from the worst recession in 70 years sputtering. Economic growth slowed markedly in the 2nd quarter this year and Federal Reserve Chairman Ben Bernanke said last week the central bank stood ready to take new steps to bolster the economy if needed.
President Obama welcomed Friday’s labor market report as “positive news”, but said more needed to be done to help the economy and he promised an outline of new measures next week. “The economy is moving in a positive direction, jobs are being created — they’re just not being created as fast as they need to given the big hole that we experienced,” he said. Obama’s plans could include extending middle class tax cuts, delivering more tax cuts to businesses to encourage hiring, investing in clean energy, and spending more on infrastructure. But the White House cautioned that the measures should not be seen as a second stimulus package. Lawmakers are in no mood to approve a big new spending plan that would add to the fiscal deficit.
More U.S. stocks are paying dividends that are higher than bond yields than any time in at least 15 years as profits rise at the fastest pace in twenty years, 68 companies in the Standard & Poor’s 500 Index have dividend payouts that exceed 3.78%. If we are going into a double-dip recession (see the upcoming Vos Corner for more information on the threat of a double dip), maybe we are not as cheaply priced as one would suggest we should be. Conversely, if we are just experiencing a slowdown in growth, but we are avoiding a recession, then prices are clearly attractive. The last time the number of S&P 500 companies paying dividends above the corporate bond rate approached the current level was in March 2003, data compiled by Bloomberg show. That was just after the start of a bull market in which the equity index more than doubled over 5 years. The S&P 500 to 12 times estimated profits in the next year, near the lowest since March 2009. That is giving investors a chance to buy stocks that pay more than bonds and offer more potential for price gains. Companies in the S&P 500, including more than 120 that offer no dividend, pay an average of 2.01% of their share price to shareholders, up from 1.8% in April, Bloomberg data show. U.S. corporate debt yields fell to 3.7% on August 24th the lowest level in 20 years of information tracked by Barclays Plc. The S&P 500 companies’ cash probably has grown to a record for a 7th straight quarter, according to S&P, for companies that reported so far (not all have), balances increased to $824.8 billion in the period ended June 30th it is more than $1 trillion if you count all the companies - cash represents 10.2% of total assets.
The economy is slowing down, but productivity has been so great in this country and companies have been able to make good profits. Investors will keep worrying about a possible double dip in the next few weeks.
In Europe this morning banks led stocks lower on concern they’ll require more capital to compensate for holdings of bonds in Europe’s weakest economies. Germany’s banking association said yesterday that the nation’s lenders need to raise $135 billion and Pacific Investment Management Co. (PIMCo) said Greece still faces “substantial” default risk. Policy makers in Japan and Australia cited concerns over the outlook for the U.S. in keeping interest rates on hold today. In addition, basic-resources stocks are lower as Australian Prime Minister Julia Gillard clinched a deal to keep power. Gillard’s Labor government has proposed a tax on mining profits. There is always something to worry about as an equity investor and that will not change in the short-term but with current valuations and some growth in the economy stocks are reasonably valued. North American stock markets will also likely open down by a nominal amount since it has been a great run. Oil prices are also down.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
