Stocks regain footing, inch higher

Big Picture

Stocks regain footing, inch higher

Most major equity markets advanced on the week brushing aside mixed US economic data and a big slide in Japanese stocks.

In Japan, the benchmark Nikkei index has shed more than 13% since May 22 taking it into official correction territory. The big move down has not rippled into other global markets as the losses are primarily being attributed to profit-taking. The Nikkei has been on fire over the last six months with the index rising about 70% from mid-November through mid-May. Closer to home, US first-quarter GDP came in at an annualized 2.4% Thursday which was revised down from earlier estimates of 2.5%. The downward revision on what was already a so-so estimate is another sign of the slow, halting US economic recovery; the weakest on record since WW II. This was further evidenced by data showing the number of people filing for first-time jobless benefits rising for the third week in a row, a blow to hopes for more sustained jobs improvement. Investors did, however, take solace in strong housing and consumer confidence numbers released after Memorial Day. Home prices across the US rose on average 10.9% from a year earlier, the largest gain in seven years (home prices are still down an average 28% across America from their 2006 peak). In addition to the positive housing numbers there was also good news in May’s consumer confidence data with the headline read coming in at 76.2 up from 69 in April. That’s the highest the gauge has been since February 2008 which led to spirited buying Tuesday after US markets re-opened following the holiday weekend.

 

Markets

Toronto, New York up on the month and year

With one trading day left in May the big North American indexes are on course to end the month in positive territory. Indexes also remain positive for the year with the TSX composite up 2.52%, the Dow up 16.94%, the S&P 500 up 16.0% and the Nasdaq higher by 15.62%. For the four-day period covered in this report, the TSX was up 79 pts. to finish at 12,746, the Dow rose 21 pts. to end at 15,324, the S&P 500 gained 5 pts. to close at 1,654 and the Nasdaq rose 32 pts. to settle at 3,491.

 

Scotia’s Recommendation

Keep one eye on the golf ball, and the other eye on incoming data

• Equities - Himalaya Jain, Director, PAG, wrote “With earnings season now over and US equities trading close to fair value, we expect near-term equity direction will be driven by incoming economic data as the Fed deliberates a potential unwinding of quantitative easing (QE). Recognizing that the greatest perceived risk to capital markets is a disorderly unwinding of QE, we expect the Fed will continue to be clear and transparent in the communication of its policy. Assuming an orderly unwinding of QE in the coming months or quarters, we believe US equities should outperform most other asset classes. We have started to witness early signs of sector rotation from defensives into cyclicals within the US equity market, a trend we think should continue if US labour and housing markets maintain their current momentum. We expect Canadian equities to remain range bound in the near term.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: Following Chairman Bernanke’s initially dovish comments he noted that the Fed could begin to reduce asset purchases over the course of the next few Fed meetings, if the Committee was confident that labour market improvements were sustainable. These comments, along with the plethora of competing views from other Fed speakers last week, will likely encourage a greater degree of bond market volatility going forward. Although we continue to believe that bonds will likely remain range bound through the summer, the current monetary policy backdrop is shaping up to be not particularly hospitable to bonds going into Q4/13 – particularly if the US data continues on a positive footing. For this reason we continue to urge investors to carefully evaluate their fixed income exposures, remaining overweight credit and shorter duration.”

 

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.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.