Economic data keeps market rolling

Big Picture

Economic data keeps market rolling

Good news on the US economy kept markets rolling this week despite a downbeat World Bank 2013 growth forecast.

The most notable economic release was a US home building report that showed a 12.1% rise in housing starts for the month of December. That solidly beat expectations as did the number of new homes started for the year, which came in at 780,000 – the highest tally since 2008. Housing has been one of the key drivers fuelling the US economic rebound over the past 18 months. Keep in mind that even though the 780,000 new homes started last year was the best in five years, it is well below the 50-plus year historical average of 1.5 million new homes annually constructed. In other words, it appears the sector has plenty of room to run. In other economic news, the Commerce Department released retail sales numbers which showed a 0.5% increase for December more than doubling the expected rise of 0.2%. The final piece of good news came in the form of new jobless claims which also surprised by coming in significantly lower than expected.

The positive economic data trumped a downbeat growth forecast earlier in the week from the Washington-based World Bank. The bank cut its global growth forecast for this year from 3% to 2.4% citing the usual suspects: austerity measures, high unemployment and low business confidence in developed nations. Meanwhile, the impact of the euro-zone crisis showed up in Germany’s annual GDP number which stood at 0.7% last year compared to 3.0% in 2011 and 4.2% in 2010. Finally, the US Q4 earnings season continued to unfold this week with 38 S&P 500 companies expected to report by end of day Friday. Thus far it’s been relatively benign with no big surprises, which has also helped push markets higher. In Canada, the TSX earnings season kicks off in early February.

Markets

January turning into a winning month for New York and Toronto

The winning streak continues for stock markets here and south of the border in the month of January. For the four-day period, the TSX was up 72 pts. to close at 12,674, the Dow rose 108 pts. to finish at 13,596, the S&P 500 advanced 8 pts. to end at 1,480 while the Nasdaq rose 11pts. to close at 3,136.

Scotia’s Recommendations

Fund flows suggest investors are finally migrating from bonds to equities

• Equities - Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “Hurricane Sandy and fiscal cliff uncertainty represent potential downside risk to US Q4 earnings. While we remain bullish on equity markets for 2013, Q4 earnings and debt ceiling worries could trigger a short-term pullback in equity markets. We would treat market weakness, if any, as a buying opportunity.”

• Fixed income - Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – 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 – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Equity inflows should unlock discounts and we believe P/E multiple expansion could be a bigger driver of returns. In terms of leadership, higher-dividend sectors (as a byproduct of fixed income flows and equity apathy) stand to underperform while “growth” benefits from money coming back home to equities.”

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