Seesawing US earnings, mixed economic data souring sentiment
North American equity markets took their cue from US corporate earnings this week which continued to be mixed, with company executives expressing cautious outlooks.
There have been a handful of notable ‘beats’ by blue-chip companies that other global growth bellwethers have ‘missed’. On balance, the situation could be far worse as the earnings scale is far from tilting decidedly negative. The inconsistency with earnings was also evident in US economic data. On the plus side, new homes sales numbers for single family units surged in September to their highest level in two-and-a-half years as did durable goods orders which jumped 9.9%. U.S. Q3 GDP growth also came in better than expected. Less positive were initial claims for unemployment benefits which didn’t fall as much as expected while pending home sales for September barely budged which was also unexpected. With a lack of decisiveness to both corporate earnings and economic data sentiment remains neutral.
Overseas, the euro zone remained relatively uneventful for the second week in a row expect for a number of Greek-euro finance officials meetings aimed at securing additional financing for the deeply indebted nation. A three-month high in a Chinese purchasing managers index released early in the week was also worthy of note. With relatively few companies reporting today (Oct. 26), investors should look to the markets to take their direction from US Q3 GDP and consumer sentiment numbers.
TSX holds its own, US markets suffer
The TSX hung in over the four-day period losing 115 pts. to end Thursday at 12,300. Although gold is trading near its lowest level in 5 weeks, it was the gold miners that provided a floor for the index with many shares posting strong advances Thursday.
In New York, the Dow and S&P 500 are both off more than 3% for the week since this report was last released; the Nasdaq is down almost 3%. For the four-day period, the Dow lost 240 pts. to finish Thursday at 13,103, the S&P 500 shed 21 pts. to close at 1,412 and the Nasdaq fell 19 pts to 2,986.
Continuing to favour cyclical stocks
- Equities. Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “We continue to recommend increased weighting toward cyclicals and caution that defensive sectors (REITs, telcos, utilities) are likely to face further pressure. We see economic momentum building in 2013 and think investors should be deploying cash into equities in the near term, especially during instances of market weakness.”
- Fixed income. Andrew Mystic, Associate Director, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
- Portfolio strategy. Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Earnings estimates also appear to have bottomed, but a broad upward trend has not yet emerged. In our opinion, broad positive earnings revisions should materialize along with recovering PMI/ISM surveys, thus sustaining equity/cyclical outperformance into 2013.”