Big Picture

US recovery fears rise, European debt reminders, austerity budgets

The week got off to a good start on the back of a Fed-inspired rally Monday but the gains could not be held to close of trade Thursday for global equity markets. An accumulation of less-than-rosy US economic data – consumer confidence numbers, durable goods orders and lower-than-expected GDP growth – over the four days had traders second guessing the US recovery.

In Europe, markets also got a boost Monday on talk of a doubling in size of the financial firewall for the euro-zone to 1-trillion euros. But as was the case in the US, economic data spoiled the party and by Thursday ten-year bond yields in Spain and Italy were jumping once again; well above 5% as a reminder of the difficult situation the euro-zone still finds itself in.

Overall, US and European growth fears have reasserted themselves and a sense that China may not come to the rescue has put a damper on what has been a solid Q1; particularly for American markets.

In Canada, eyes were focused on the release of Ontario and federal budgets. Austerity was the dominant theme. Ontario cut a wide range of programs while Ottawa slashed more than $5 billion from spending and pushed back retirement from 65 to 67 years of age.

Markets

Dow, S&P 500, NASDAQ notch strong quarters, TSX trailing

The Dow and S&P 500 settled lower for the four sessions while the NASDAQ was virtually unchanged. With one trading day left in the quarter, advances for all three indexes are impressive for the three-month period with the Dow up 7.6%, the S&P 500 up 11.6% and the tech-heavy NASDAQ up an eye-catching 18.2%.

A strong triple-digit gain by the S&P/TSX Monday was more than erased by end of trade Thursday with the benchmark index losing 125 points over the four sessions to close at 12,339. With one trading day left in the quarter, the TSX has lagged US markets posting a gain of only 3.2%, held back by the energy and gold sectors.

Our Recommendation

Stock selection becoming increasingly important

• Equities. Steve Uzielli, Portfolio Manager, Portfolio Advisory Group (PAG) wrote: “With a U.S. Election ahead of us in November we are concerned that the summer months could be extremely quiet for both the news and stock trading volume. This makes stock selection and sector rotation within equity portfolios all the more important.”

• Fixed income. Anthony Mentor, Associate, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy. Scotia Capital Portfolio Strategist Vincent Delisle says: “As both economic and financial confidence recuperate, market volatility has dramatically abated in recent weeks…2012 is off to a great start for the "risk-on" trade and it feels like a stock-picker's market again..”

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