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.


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.”

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.

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About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

Jeff is an advisor and partner with The Navigation Team at Scotia Wealth Management.

He lives in Kelowna with his wife Tanya, their two university bound daughters and their canine kids.

You can contact Jeff by email at [email protected]


The Navigation Team

Scotia Wealth Management

This column is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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