Paths to new highs will have to wait
Markets took a breather this week as political worries rose in Europe and US economic data softened.
In the US, initial jobless claims declined last week to 366,000 which was good but the expected number was 360,000; a slight negative. Even with the disappointment, however, the four-week moving average is at levels not seen since 2008. Fourth-quarter productivity also declined more than expected with a 2.0% pullback versus an expected 1.6% fall. Unit labour costs also rose higher than expected. In the meantime, Europe bounced back into the news for largely political reasons. On Thursday ECB President Mario Draghi kept interest rates on hold at 0.75% for the seventh straight month which led to grumbling that the ECB is the only central bank that isn’t loosening its policy. Many believe the run up in the value of the euro stems from a lack of loosening at the ECB. A strong euro, critics say, will hamper an expected but fragile regional recovery this year. The ECB announcement came in the wake of rising Italian and Spanish bond yields which stirred on talk of corruption in Spain and a possible electoral comeback by discredited former Italian PM Berlusconi.
With earnings season coming to a close south of the border it’s worth noting the positive impact corporate America has had on the markets of late. As at the close of trade Wednesday, 74% of S&P 500 companies beat expectations with many being of the large, blue-chip variety. Looking ahead, many Asian markets – China, Taiwan and Hong Kong – will be closed for all or part of next week due to the Lunar New Year, the region’s biggest shopping season.
North American markets edge back
For the four-day period covered in this report, the TSX fell 13 pts. to end at 12,755, the Dow gave back 65 pts. to finish at 13,944, the S&P 500 fell 3 pts. to settle at 1,509 and the Nasdaq shed 13 pts. to close at 3,165.
Investors should be reducing bond exposure and shifting toward equities on any stock market weakness
- Equities - Himalaya Jain, Director, PAG, wrote: “US-listed equity mutual funds and ETFs recorded $77.4 billion of inflows in January, $23.7 billion higher than the previous record of $53.7 billion in February 2000, according to TRIMTABS. The “Great Migration” into equity from bonds appears to have started. While the pace may not be as strong as January, we believe 2013 should witness additional rotation, thereby pushing equity P/E multiples and long-term government bond yields higher.”
- Fixed income - Andrew Mystic, Associate Director, PAG, wrote “With medium- and long-term bond yields biased higher, we think it makes sense to evaluate fixed income exposure as to weighting and duration, with the next logical strategic asset mix shift being a reduction of fixed income holdings and shortening of portfolio duration. For higher quality, shorter term credit exposure, GICs continue to offer better returns than comparable quality deposit notes.”
- Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Risk-On leadership is currently supported by strengthening US housing/employment data, recovery signs in China, a lower yen, and positive equity funds flows. Although improving US and China momentum has been in place since Q3/12, a sliding yen and equity inflows mark a complete reversal from last year’s environment, fuelling risk appetite.”
This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. (“SCI”), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your investment advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author accept no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice. All performance data represents past performance and is not indicative of future performance.
Read more Navigating Your Wealth articles
- Why buy money market funds? Jul 3
- Are we there yet? Jun 26
- ECB rolls out stimulus measures Jun 12
- Estate planning isn't just for the wealthy Jun 5
- On mixing business and personal May 29
- US stocks pull back from records May 22
- Unintended consequences May 15
- Don't talk to me about insurance! May 8
- Between a marshmallow and a hard place May 1
- On living and dying Apr 23
- Valuation fears grip markets Apr 16
- US Fed assures on interest rates Apr 9
(Click for RSS instructions.)