Big Picture

Stocks barrel ahead

Markets continued to rise ignoring looming US budget cuts, euro zone flare ups and less-than-stellar economic news here and south of the border.

The single biggest hurdle cleared on the week was the government-related uncertainty coming from Italy. Italians went to the polls over the weekend and upset existing political order by voting out pro-austerity politicians. The final tally failed to produce a clear winner, which means the country will be steered by a coalition government with an anti-austerity mandate; the thought of which spooked investors. What helped calm the markets were comments from Fed Chairman Bernanke on Tuesday as he appeared before the Senate Banking Committee. Bernanke played down concerns about economic stimulus ending in the US and staunchly defended the Fed’s bond-buying program. Bernanke’s words eased concerns of a euro flare up, as did an auction of Italian 5- and 10-year bonds in which yields stayed below 5%. On the economic front, US GDP came in at a mediocre .1% for the last quarter of 2012 (Canadian GDP numbers are released Friday) but the lack of growth hardly dented market enthusiasm. Nor did the prospect of US$85 billion in mandatory spending cuts due to be triggered March 1 south of the border.

Markets

Another winning month for Toronto and New York, Dow reaching for highest close ever

Months-long winning streaks for North American indexes were extended at the close of February with the TSX notching a third up month and major US benchmarks going one better completing a four-month string of unbroken advances. The Dow notched its second highest close ever on the last day of February falling short of its all-time high by about 50 pts. YTD the TSX composite is up 3.12%, the Dow 7.25%, the S&P 500 6.20% and the Nasdaq 4.66%. For the four-day period covered in this report, the TSX added 121 pts. to finish at 12,821, the Dow jumped 54 pts. to close at 14,054 and the S&P 500 shed a point to end at 1,514.

Scotia’s Recommendation

Our outlook on equities remains positive, particularly U.S. equities

• Equities - Himalaya Jain, Director, PAG, wrote: “We have been expecting a short-term equity market correction after strong January performance. The trigger was Monday’s Italian election stalemate that rekindled worries about Europe. The upcoming U.S. budget cuts are also adding to near-term investor anxiety. Meanwhile, U.S. economic data and corporate earnings are highly supportive of further U.S. equity gains in 2013. As we expect further declines in equity markets to be limited (2%-4% in U.S. and Canada), we remain constructive on equities over the medium term, particularly in the U.S.”
• Fixed Income - Andy Mystic, 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. Although we continue to expect Canadian bonds to hold in better in the near-term - as European, sequestration and softer Canadian data concerns lend themselves to a risk off tone - a strengthening US economic backdrop will likely to lead to a rising rate environment – particularly in the second half of 2013. We view this more as an opportunity to re-balance rather than a meaningful reversal of longer-term themes.”
• Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Should Chinese inflation get back on policymakers’ radar screens soon, it could prove troublesome for commodities and threaten leadership at a time when U.S. improvements are more visible and Fed policy remains accommodative.”

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.