Strong January for NA stocks
Equity markets consolidate gains at month-end
Stocks staged a modest pull back in the finals days of the month but it wasn’t nearly enough to reverse the impressive gains recorded in January.
Taking the wind out of the markets sails were mixed economic data out of the U.S. which was released at the latter part of the week. Most concerning was a report by the Commerce Department Thursday that showed consumer spending had risen at half the pace in December - 0.2% versus 0.4% in November. Economists had expected consumers to start spending less this year simply because their take-home pay had been reduced. The fiscal cliff agreement reached January 1 allowed Social Security taxes to rise this year leaving single- and dual -income earning households with less in their pockets; about $1,000 less for single people making $50,000 a year and about $4,500 less for two income earners in the same household. The diminished pay could slow consumer spending, which represents about 70% of economic growth, at an important moment. The U.S. economy unexpectedly shrank in Q4 at an annual rate of 0.1%, the government said Wednesday. The dip was a reminder of the economy’s vulnerability. A fact not lost on the Fed which delivered a relatively tepid assessment of the economy also on Wednesday. The Fed would, as a result, keep its foot on the gas and keep its bond-buying program in place for the foreseeable future. Today’s (Feb. 1) U.S. jobs report may set the tone for the markets as we get February underway.
Strong January for North American stocks
The month was kind to stock investors on both sides of the border. The TSX Composite index advanced 2.02%, the S&P 500 moved higher by 5.04%, the Dow gained 5.77% and the Nasdaq rose 4.06%. Of particular note was the multi-year high breached by the S&P 500 when it crossed the 1,500 pt. mark; the Dow, meantime, is just about 300 pts. away from its 2007 high. For the four day-period covered in this report, the TSX lost 131 pts. to close Thursday at 12,685, the S&P 500 shed 4 pts. to close at 1,498, the Dow lost 35 pts. to finish at 13,860 and the Nasdaq gave back 7 pts. to end at 3,142.
Investors should be reducing bond exposure and shifting toward equities on any stock market weakness
- Equities - Himalaya Jain, Director, PAG, wrote: “In addition to improving fundamental data (which should drive corporate earnings), one of our key themes for 2013 is that the three decade long bull market in bonds is likely over. As bond portfolios underperform (and generate rare negative returns that may catch many investors by surprise), we expect the rotation into equities could push valuation multiples higher leading to a very attractive equity environment. We continue to favour U.S. equities over Canadian ones, and prefer cyclicals over defensive sectors.”
- Fixed income - Andrew Mystic, Associate Director, PAG, wrote “U.S. funds flow data are suggesting that bonds are overbought. Between 2009-2012 roughly U.S.$1,055 billion of net fund inflows migrated to fixed income funds. By far, this represents the largest fixed income inflow seen over the course of a near 20-year period. Although the 2008 crisis and the subsequent turbulence warranted a migration into the safety/comfort of fixed income, the current landscape is suggesting that complacency could carry risks – in what has typically been perceived to be the more stable asset class.”
- Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Positive equity flows are a more common fixture in the first quarter, and we believe improving macro data (U.S. housing, employment), seasonality, and a liquidity drawdown should support equity markets further in the near term.”
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