Volatility up, equity markets down

Market Big Picture

Jittery markets eye data

After a rocky start to the week, markets remained jittery as traders looked to economic data for guidance. Today’s (Feb. 7) US jobs report may point the way forward as it’s the one Fed officials watch closely to determine future monetary policy. The report has taken on added significance because the previous one landed with a thud in January. It painted a still-iffy employment picture and if we see a repeat today, markets could darken. But the opposite may also come to pass. The most likely scenario, however, is another murky report that breeds more uncertainty. Spirits were lifted Thursday after a jobless claims report unexpectedly showed the number of people filing for benefits falling to 331,000 from 351,000. The previous day, however, private payroll firm ADP weighed in with its jobs report which pegged the number of new jobs at 175,000 in January; 15,000 below expectations. The number economists are looking for today is 189,000. In other economic news, the ECB left interest rates unchanged but the central bank did say future rate cuts and increased stimulus measures are on the table. Finally, there may be another debt-ceiling dust-up in the offing as the US government hits its debt limit today. Although the federal government will be able to use special measures to continue spending it can only tap those measures until late February.

 

Markets

US stocks demonstrate resilience

The month may have changed but the pattern of volatility we’ve seen in the markets of late has not. On Monday, the Dow plunged 326 pts. or 2.1% in the biggest sell-off in more than seven months but buyers quickly returned and the blue-chip index recorded its biggest one-day gain of the year Thursday, up 188 pts. or 1.22%. For the four days covered in this report, the Dow fell 70 pts. to end at 15,628, the S&P 500 fell 9 pts. to settle at 1,773 and the Nasdaq shed 46 pts. to close at 4,057. The TSX rose 19 pts. over the period to finish at 13,713.

 

Our Recommendations

Volatility up, equity markets down; Are we worried? No

• Equities - Himalaya Jain, Director, Portfolio Advisory Group wrote “When we advocated raising cash two weeks ago (HWWT, Jan 21) even we didn’t expect the sell-off to start so quickly and proceed as fast. The pullback does reaffirm our view that 2014 is going to be much different than 2013, both in terms of return expectations and volatility. With most investors singing from the same song sheet (i.e. overweight equities in developed markets) it is reasonable that markets were reflecting this optimistic consensus view. We think the recent weakness in U.S. economic data has been tainted by severe weather and is not indicative of a momentum shift in the economy. While businesses are still somewhat cautious, the corporate earnings recovery appears to be intact and this forms the basis of our expectation that equity markets should end the year higher than where they started. With the S&P500 off 5% YTD, we think a further 2%-4% slide is plausible, and should it occur it would return the forward P/E of this market to a more reasonable14x (from 15.4x at the peak). Having raised some cash in the past few weeks, we are looking for opportunities to redeploy. In the near-term, we have sought the safety and income of higher dividend paying stocks (and preferreds) as we are unsure how long this sideways market may continue. Once the risk/return equation improves we anticipate venturing further into European equities and expect to rebuild U.S. equity positions. Given the relative YTD outperformance of the Canadian equity market, we no longer have a bias toward Canada.”
• Preferreds - Tara Quinn, Director, Portfolio Advisory Group wrote: “Approximately $1.1 billion of bank rate reset preferred shares will be redeemed during February. With the resulting influx of cash we anticipate that preferred share markets will be well bid through the month as investors put these proceeds to work. We recommend reinvesting into existing non-NVCC bank perpetuals. Since the majority of existing bank perpetuals are not Basel III compliant they will likely be called prior to 2022 and thus trade with a shorter duration than non-bank perpetuals. Some issues we have been looking at are BNS.PR.M, BMO.PR.J, and RR.PR.E which have a yield to worst of approximately 3.93%.”  

 

Email Jeff with your comments or questions: [email protected]

All performance data represents past performance and is not indicative of future performance. 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. ® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod. ScotiaMcLeod is a division of Scotia Capital Inc. ("SCI"). SCI is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

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