The recent increased volatility, which shook commodity prices this week has slowed Canadian stock market growth to the point that we’re now slightly negative on the year. Our outlook however remains positive and we continue to expect low double digit returns by year end.
JP Morgan also maintain a positive outlook on the US market and see the S&P 500 reaching 1475 by year end, a 10% increase.
April had a 730pt swing on the TSX during the month but only finished down 170pts. It was an interesting month but pales with the first week of May:
May 1st – Obama gets Osama. Economists are split on whether this is a negative or a positive. The negative position worries about the backlash of terror attacks adding an aspect of risk to the economy. They further point out that this event does not impact earnings, unemployment or economic expansion. The positive position believes that the death of Osama bin Laden is a devastating blow to Al-Qaeda especially as it appears he was still playing a major leadership role, increased Arab democracy, a “Post Al-Qaeda era” and lower oil prices as a result of increased long-term Middle Eastern stability.
May 2nd – the Canadian markets were quiet post the Osama news and prior to the election. We witnessed a ‘Conservative Majority Government’ with the NDP as the official opposition. Regardless of how you voted, a majority government is viewed as stable to international observers. It is also the most market-friendly result with a government focused on controlling the deficit and able to enact measures without the inevitable compromises associated with a minority status.
May 3rd and 4th – the TSX was weak in anticipation of a minority government so we should have seen a nice rebound on the Tuesday. Instead, the markets started off with a decidedly negative tone which persisted for the remainder of the week with the exception of Friday. One of the catalysts was the announcement by the COMEX exchange that it was increasing margin requirements for silver purchases to “shake out” speculators. It was effective as silver prices fell from a high of US$50.00 per ounce to a low of US$33.00 on Friday, a decline of over 30%. The silver sell-off spurred on the decline of other commodity prices including gold, base metals, crude and grains. At the end of the day, the TSX was down 240pts and 80pts.
May 5th – The European Central Bank kept interest rates unchanged and Governor Trichet made dovish comments which caught investors off guard as hawkish comments were expected. Following his comments, the Euro fell hard and caused the U.S. dollar to rally adding further downward pressure to commodity prices. Such moves emphasized what the press described as investors taking ‘risk off the table’. Economic data prints didn’t help the market tone throughout the week as we saw a very disappointing ISM Non-Manufacturing Index, an ADP employment change that missed expectations and U.S. jobless claims that continue to rise on a week over week basis.
May 6th – Some of these disappointments were put off to the side on Friday when the U.S. employment report revealed that our neighbours to the south created 244,000 jobs in the month of April when economists were only looking for 185,000. At this rate of job creation, it’s still going to take another two to three years to gain back all the jobs lost in the recession. However, if we want to take away a positive from this report, we would note that we’ve seen a continuation of a trend that emerged at the beginning of the year where most jobs that are being created are private jobs and not public (government) jobs. Canada also had a respectable showing creating 58,300 jobs when economists were looking for a gain of 20,000. The Canadian dollar had a rough week. While some traders expected the loonie to strengthen, or at least maintain support levels after the election, the downward pressure on commodity prices was too much to ignore resulting in a weekly decline of over two cents versus the U.S. dollar. The TSX rallied 111pts on Friday.
While there was little reaction to the Conservative victory thanks to the volatility of commodity prices, we would conclude that the market did care that the Conservatives won a majority. Their platforms and their corporate tax and deficit reduction policies alone are more ‘market friendly’ while the increased spending proposals by the NDP left voters and investors with some unanswered questions. Corporations will be happy that the Conservatives will push ahead and lower corporate tax rates from 16.5% to 15.0% next year while the NDP wanted to raise rates back up to 19.5% to raise revenue for their new spending programs. The NDP also wanted to end certain subsidies to the oil patch and go after bank card and credit card fees. Since the Conservatives will likely leave these issues alone, energy companies and banks will be happy as will investors since financial and commodity related stocks make up over three quarters of the TSX index. Foreign investors will also be happy that Canada will stay on track to balance its budget within the next 4 year. Now that we have a majority government in Canada there will be no election for the next 4 years.
The market is now worried a little more about QE2 going away and so it could well be the first year in awhile where “sell in May and go away” works somewhat. Having dividend-paying stocks to collect if that happens is a good strategy in this environment.