Stocks slump on growth fears

Big Picture

Stocks slump on growth fears

It was a tough week for stock markets around the world with many registering their biggest point declines in months.

The trigger lay in re-ignited fears over slowing global growth in two of the world’s three economic engines. On Monday, China surprised with weaker GDP growth than expected as the country grew 7.7% year-over-year in the first quarter down from 7.9% in the fourth quarter. Decelerating industrial output in China also disappointed investors who turned to the sell button in response. Word the IMF was cutting its global economic forecast for growth added to the worries as did leading economic indicators south of the border which came in below expectations on Thursday. The March Philadelphia Fed Survey's general business conditions index came in at 1.3, far below the 3.3 reading economists had forecast. Earlier in the week, the New York Fed’s Empire State index of manufacturing activity also slipped more than expected. Meantime, lackluster earnings south of the border had investors on the defensive as top-line results have been uninspiring even if bottom-line numbers are beating. Of the S&P 500 stocks that have reported first-quarter results to end of day Wednesday, 71% have beaten analysts' predictions on earnings but only 52% have done it on sales.

Markets

US and Canadian markets register sharp losses

Major indexes north and south of the border lost ground with the pain a little more acute in Canada as the commodity complex took it on the chin. This was particularly true of gold which notched its biggest one-day price decline in 30 years on Monday; oil prices also retreated. For the four-day period, the TSX shed 341pts. to end Thursday at 11,996. South of the border, the Dow fell 328 pts. to close at 14,537, the S&P 500 gave back 47 pts. to finish at 1,541and Nasdaq lost 128 pts. to close at 3,166.

Scotia’s Recommendation

Headline economic indicators moderate; looking to Q1 corporate earnings as next catalyst

• Equities - Himalaya Jain, Director, PAG, wrote “Although we are maintaining our preference for equities, our near-term enthusiasm is being tested by weaker than expected economic indicators. Some of the weakness could be temporary (U.S.), while some may have longer duration than we initially anticipated (Europe). China’s growth demands close monitoring, but we remain of the view that its growth should accelerate toward year-end. Although U.S. corporate earnings are off to a good start, we are raising our caution level one notch as we expect equity market returns to be modest over the next two to four months. We expect Canada to continue underperforming until the dual overhang of a cooling housing market and weak commodity environment clears.”
• Fixed Income - Andy Mystic, Director, PAG, wrote: “Following the disappointing March non-farm payrolls and this week’s sell-off in gold, US 10-year treasuries have fallen below their 200-day moving average and into a new trading range – with US 10-years now trading around 1.72%. We think it makes sense to evaluate fixed income exposure as to weighting and duration as the next logical strategic asset mix shift being a reduction of fixed income holdings and shortening of portfolio duration”
• Preferred - Tara Quinn, Director, PAG, wrote: “For the second week in a row the preferred share market started to retreat slightly as spreads on non-investment securities widened. Our recommendation in this environment continues to be focused on investment grade securities which provide an attractive dividend to holders. The floating rate sector of the market also looks attractive. Although we are not expecting a large move in the short end of the yield curve in the near term, we are expecting higher rates in the future and the floating rate sector should perform well in a rising interest rate environment.”

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