Mid November Market Commentary
http://www.torontotalks.org/articles/33/1/Mid-November-Market-Commentary/Page1.html
John Klotz
By John Klotz
Published on 01/28/2008
The Canadian equity market rebounded following a devastating September.
The Canadian equity market rebounded following a devastating
September. The TSE 300 managed to continue to recover from the closing
low of 6513 it established on September 21. While it remained short of
its pre-September 11 level, by the end of October Canada's closely
followed stock index had rebounded 5.72 per cent from the year's nadir.
The 14 Toronto industry groups ended October evenly split among winners
and losers. The Oil and Gas sector gained the most, advancing 10.9 per
cent on the month as speculation grew that the Organization of
Petroleum Exporting Countries would cut daily production over the next
few weeks in an effort to maintain crude oil prices between the
desirable US$22-27 a barrel level. That speculation coupled with
further consolidation in the sector gave rise to stocks such as
Precision Drilling (+21.4%), PanCanadian (+17.2%) and Alberta Energy
(+16.6%) to name a few. The Transportation and Environment (+7.5%)
sector fared well in October, regaining precious lost ground during
September. While airline stocks WestJet Airlines (-1.1%) and Air Canada
(-27.5%) failed to make any inroads, railway stocks proved resilient.
C.N. Railway rose 5.7 per cent on the month, while newly listed
Canadian Pacific Railway Ltd. enjoyed a strong performing month after
being added to the TSE 300, TSE 100 and S&P/TSE 60 indexes. There
were also impressive gains in the Industrial Products (+4.6%) and
Consumer Products (+4.5%) sectors. Health Care stocks, such as QLT Inc.
(+48.9%) and MDS Inc. (+13.2%) supported the latter, while renewed
investor interest in Technology-related stocks helped the Industrial
Products (+4.6%) group. Ballard Power Systems (+38.5%), C-MAC
Industries (+8.1%) and Nortel Networks Corp. (+4.5%) were among the
sub-sector's top performing names. Further evidence of an economic
slump and news that major Canadian banks were shoring up their
loan-loss provisions hurt sentiment for this country's major financial
institutions. Concerns over bank exposure to weak capital markets also
bruised sentiment for their stocks. Bank of Montreal saw its stock
price trimmed by as much as 13.8 per cent in October. Toronto-Dominion
Bank, CIBC and Bank of Nova Scotia all succumbed to price pressure as
well. Uncertainty over the final tally of the September 11 terrorist
attacks on New York weighed on Manulife Financial, whose stock lost an
additional 5.1 per cent in October. Appreciation in Financial Services
stocks Investors Group (+8.9%), Sun Life Financial (+4.1%) and C.I.
Fund Management (+3.1%) helped the sector limit its month-over-month
losses to 4.7 per cent. The Real Estate sector was also hit hard in
October given the economic slowdown. Losses in sector components
TrizecHahn Corp. (-11%), Brookfield Property Corp. (-11.2%) and
Boardwalk Equities (-12%) erased 8.9 per cent from the value of the
sector.
BOND MARKET
Review
Nervousness over the state of the equity market and further evidence of weak economic conditions sent investors looking for cover once again. The benefactor remained the Canadian bond market, which experienced another strong month. Actions undertaken by the Bank of Canada (BoC) on the interest rate front also supported the debt market. While a cut in the BoC Bank Rate was highly anticipated, the central bank surprised economists and investors alike with a 75-basis point cut on October 23. The Bank Rate, the rate at which chartered banks borrow reserve funds from the Bank of Canada, fell to three per cent. The Bank has now trimmed rates by as much as 300 basis points since its first cut this year on January 23. As a result banks trimmed their prime rate to 4.5 per cent as well as various fixed mortgage rates, pushing borrowing costs to their lowest level since 1961. Lower interest rates and weak economic data sent bond yields rallying along the curve. In particular, the long-end of the bond market rallied sharply at the end of the month following news that the U.S. Treasury would no longer be auctioning 30-year nominal or inflation-indexed bonds. The Canadian 30-year benchmark yield fell to 5.31 per cent at the end of October from 5.8 per cent a month earlier. The 30-year yield fell to its lowest level since April 1999. The Canadian dollar extended its losses during the month, hitting an all-time low of C$1.5888 or US$0.6294, a drop of 0.62 per cent during the month. Weaker commodity prices, a looming global recession and sharply lower interest rates domestically dragged the loonie down to new record lows. The debt crisis rattling Argentina also pressured the Canadian dollar.
U.S. MARKET
Review
Despite concerns over Anthrax reports and rumours of imminent terrorist attacks on other American landmarks, U.S. stock prices staged a rebound in October on the back of investor belief that earnings and economic growth will recover next year. Amid the busiest weeks for third quarter earnings-reporting season, more S&P 500 companies had beat ‘Street' expectations as of October 31, compared to those that have met or fallen short of estimates. Contributing to the upbeat mood among investors were comments from Federal Reserve Chairman Alan Greenspan, who told Congress on October 17 that the impact of the 9-11 attacks on the consumer and business sectors has been partial and presumably temporary. In an effort to kick-start growth, the Federal Reserve cut interest rates for the ninth time this year. The half percentage point cut on October 2 brought the key federal funds rate to a near 40-year low of 2.5 per cent. Taking inflation into account, real U.S. short-term rates fell to zero. Rates were further cut in November, by yet another 50 basis points, in response to record-low consumer confidence, an annualized 0.4-per cent contraction in third quarter GDP, falling manufacturing activity, shrinking retail sales and rising unemployment. During October, key stock indices touched their highest levels in two months, retracing part or all of the lost ground incurred in September. Building on gains that started in the last part of the third quarter, the S&P 500 Index rose 1.9 per cent in U.S. dollar terms (+2.4% in Canadian dollar terms - CDT) in October while the Dow Jones Industrial Average climbed 2.6 per cent (+3.1% CDT). The tech-laden Nasdaq Composite Index advanced 12.8 per cent (+13.3 CDT). Small-cap stocks also enjoyed a buoyant month, rising 5.8 per cent (+6.3% CDT) in October. While Technology (+16.5%) sector stocks won the hearts and minds of investors, there were gains also in the Transportation (+5.4%), Energy (+3.2%) and Basic Materials (+2.6%) sectors. Communication Services stocks were left behind in October, losing 13.5 per cent as a group. Growth stocks outpaced value stocks for the month, with the Russell Midcap Growth Index posting the largest gain of 10.5 per cent versus 0.5 per cent for the Russell Midcap Value Index.
U.S. stock market activity is expected to remain choppy into the first half of 2002. Investors will continue to face a handful of geopolitical and economic concerns. The slowdown in business and consumer spending will likely continue to take a heavy toll on corporate profits. Except for the Healthcare and Utilities sectors, nine of the 11 S&P 500 groups are projected to show declines in profitability for the third quarter, according to Thomson Financial/First Call. Economically speaking, the third quarter GDP reading marked the steepest fall since the economy registered a two-per cent drop in the first quarter of 1991. The U.S. might manage to dodge a full-blown recession but only if Congress moves quickly to pass a US$100-billion economic stimulus package. We also expect the Federal Reserve to cut interest rates by at least 25 basis points in December for the 11th time this year. While risks remain in the current market environment, such as the possibility of a prolonged war, further terrorist attacks and economic uncertainties, opportunities are still abundant for diligent stock pickers and investors who are focused on the long term. Looking back at history, selling into crisis events has rarely been a good strategy as markets have often rallied following downturns triggered by crisis events in the last half-decade.
The Canadian stock market is caught between two opposing forces, vigorous monetary and fiscal stimulus versus a severe economic contraction. We believe that the economy will eventually respond to economic stimulus and therefore be positive for the stock market but the question remains one of time. We expect to see corporate profits falter further although we believe that investors may have seen the worst of the bad reports. Maritime Life Canadian equity fund managers are maintaining their diversified approach and their belief in careful selection of stocks whose companies are blessed with strong management, clean balance sheets, proven product lines and market share.
BOND MARKET
Review
Nervousness over the state of the equity market and further evidence of weak economic conditions sent investors looking for cover once again. The benefactor remained the Canadian bond market, which experienced another strong month. Actions undertaken by the Bank of Canada (BoC) on the interest rate front also supported the debt market. While a cut in the BoC Bank Rate was highly anticipated, the central bank surprised economists and investors alike with a 75-basis point cut on October 23. The Bank Rate, the rate at which chartered banks borrow reserve funds from the Bank of Canada, fell to three per cent. The Bank has now trimmed rates by as much as 300 basis points since its first cut this year on January 23. As a result banks trimmed their prime rate to 4.5 per cent as well as various fixed mortgage rates, pushing borrowing costs to their lowest level since 1961. Lower interest rates and weak economic data sent bond yields rallying along the curve. In particular, the long-end of the bond market rallied sharply at the end of the month following news that the U.S. Treasury would no longer be auctioning 30-year nominal or inflation-indexed bonds. The Canadian 30-year benchmark yield fell to 5.31 per cent at the end of October from 5.8 per cent a month earlier. The 30-year yield fell to its lowest level since April 1999. The Canadian dollar extended its losses during the month, hitting an all-time low of C$1.5888 or US$0.6294, a drop of 0.62 per cent during the month. Weaker commodity prices, a looming global recession and sharply lower interest rates domestically dragged the loonie down to new record lows. The debt crisis rattling Argentina also pressured the Canadian dollar.
U.S. MARKET
Review
Despite concerns over Anthrax reports and rumours of imminent terrorist attacks on other American landmarks, U.S. stock prices staged a rebound in October on the back of investor belief that earnings and economic growth will recover next year. Amid the busiest weeks for third quarter earnings-reporting season, more S&P 500 companies had beat ‘Street' expectations as of October 31, compared to those that have met or fallen short of estimates. Contributing to the upbeat mood among investors were comments from Federal Reserve Chairman Alan Greenspan, who told Congress on October 17 that the impact of the 9-11 attacks on the consumer and business sectors has been partial and presumably temporary. In an effort to kick-start growth, the Federal Reserve cut interest rates for the ninth time this year. The half percentage point cut on October 2 brought the key federal funds rate to a near 40-year low of 2.5 per cent. Taking inflation into account, real U.S. short-term rates fell to zero. Rates were further cut in November, by yet another 50 basis points, in response to record-low consumer confidence, an annualized 0.4-per cent contraction in third quarter GDP, falling manufacturing activity, shrinking retail sales and rising unemployment. During October, key stock indices touched their highest levels in two months, retracing part or all of the lost ground incurred in September. Building on gains that started in the last part of the third quarter, the S&P 500 Index rose 1.9 per cent in U.S. dollar terms (+2.4% in Canadian dollar terms - CDT) in October while the Dow Jones Industrial Average climbed 2.6 per cent (+3.1% CDT). The tech-laden Nasdaq Composite Index advanced 12.8 per cent (+13.3 CDT). Small-cap stocks also enjoyed a buoyant month, rising 5.8 per cent (+6.3% CDT) in October. While Technology (+16.5%) sector stocks won the hearts and minds of investors, there were gains also in the Transportation (+5.4%), Energy (+3.2%) and Basic Materials (+2.6%) sectors. Communication Services stocks were left behind in October, losing 13.5 per cent as a group. Growth stocks outpaced value stocks for the month, with the Russell Midcap Growth Index posting the largest gain of 10.5 per cent versus 0.5 per cent for the Russell Midcap Value Index.
U.S. stock market activity is expected to remain choppy into the first half of 2002. Investors will continue to face a handful of geopolitical and economic concerns. The slowdown in business and consumer spending will likely continue to take a heavy toll on corporate profits. Except for the Healthcare and Utilities sectors, nine of the 11 S&P 500 groups are projected to show declines in profitability for the third quarter, according to Thomson Financial/First Call. Economically speaking, the third quarter GDP reading marked the steepest fall since the economy registered a two-per cent drop in the first quarter of 1991. The U.S. might manage to dodge a full-blown recession but only if Congress moves quickly to pass a US$100-billion economic stimulus package. We also expect the Federal Reserve to cut interest rates by at least 25 basis points in December for the 11th time this year. While risks remain in the current market environment, such as the possibility of a prolonged war, further terrorist attacks and economic uncertainties, opportunities are still abundant for diligent stock pickers and investors who are focused on the long term. Looking back at history, selling into crisis events has rarely been a good strategy as markets have often rallied following downturns triggered by crisis events in the last half-decade.