May 23, 2013 / 6:00 am
Stocks press on
Most major global equity markets continued their upward journeys this week despite less-than-inspired economic data.
In the US, weaker-than-forecast employment and housing numbers were the most disappointing releases of the week (Thursday) but as dismal as they were investors largely shrugged them off. In the case of employment data, the jump in the number of people filing jobless claims was the biggest one-week increase since November. It was a similar story with regard to housing numbers in which the number of starts for April declined 16.5%; far worse than expected and the weakest read since November. Also on Thursday, the Federal Reserve Bank of Philadelphia’s May index of business activity unexpectedly fell. As market watchers know a bit of not-so-good economic news south of the border isn’t such a bad thing especially if it’s combined with tame inflation as it was this week with a low CPI number release. Slower growth coupled with a lack of inflation suggests the Fed will continue with easy money policies and bond buying to prop up the economy, which is a nice tonic for the markets. Meantime, there was little to cheer about in the euro zone as France officially fell back into recession and Germany moved closer to a double-dip slump. Hopes both countries could play a role lifting up the weaker euro zone countries now appear distant if not lost altogether. Looking ahead, it is a quiet day (May 17) for economic releases and earnings announcements the last day before the holiday weekend.
Dow, S&P 500 stay in record territory
New York indexes rose for the four-day period covered in this report with the Dow and S&P 500 staying in record territory. The blue chip index rose 125 pts. to close at 15,233 Thursday after hitting a new high Wednesday. Notably, the S&P 500 has only had three down days the entire month with the third coming Thursday. Meanwhile, the Nasdaq advanced 29 pts. to close at 3,465. In Canada, the benchmark TSX fell 82 pts. to finish the four-day period at 12,507.
U.S. equities approaching fair value; Sector rotation could be next major theme
Equities - Caroline Escott, Director, PAG, wrote “U.S. equities continue to make new all-time highs as the markets benefit from the continued support of central bank’s monetary policy. This has been reinforced by a strong Q1 earnings season and largely constructive economic news, particularly for labour and housing. While the valuation level of the S&P500 is approaching fair value, it still remains reasonable at 14.9x forward EPS, while offering a dividend yield of +2%. While we believe there will be some consolidation of the recent gains in the near term, we believe downside will be limited to something in the range of 3% - 5%.”
Fixed Income - Andy Mystic, Director, PAG, wrote: “Although we continue to maintain an emphasis on shorter duration positioning, and an overweighting of corporate credit, the potential impact of these broader macro trends is opening the prospect of selective/modest term extension for those investors willing to take on interest rate risk. Although we view higher yielding credits as generally rich at current levels, supply expectations, the renewed rally in rates, and continued demand for yield in a low rate environment will likely work to keep pricing steady as larger coupons remain attractive. For the more risk averse, GICs continue to offer the best relative value.”
Preferred Shares - Tara Quinn, Director, PAG, wrote: “If investors are interested in holding a bank floating rate preferred share, they should look at the various 2013 rate resets which have the potential of being converted into a floating rate preferred share. Each security has a different floating rate spread which will impact how the security trades and each spread should be evaluated closely. It is also recommended that investors choose a security which fits within their current portfolio.”
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