possibly worthy of a read.......
Sunday June 4 2:37 PM ET
Courage Good, Complacency Bad
By Sarah Edmonds
TORONTO (Reuters) - Everything is wonderful again for North American equities. Or is it?
The courage which filled the chests of North American investors last week after rate fears
evaporated has been great for equities. But carried too far, buyer bravado in this still
uncertain environment could put the whole house of cards at risk, strategists warn.
Weak U.S. economic data had investors on both sides of the border toasting the success of
the Federal Reserve's recent rate rises at slowing the economy and predicting that the
world's most powerful central bank's battle against inflation may be all but won.
The bellwether 300 index of Canada's largest bourse, the
Toronto Stock Exchange, advanced nearly 688 points, or
more than 7 percent, finishing the week at 9747.67.
The breadth of the rally, and the fact that it took in both a
wide assortment of stocks and included bonds, bodes well
for the near term, said Subodh Kumar, chief strategist at CIBC World Markets in Canada.
This week holds little in the way of economic news that could trip up the bullish charge. U.S.
producer prices on Thursday may spell trouble but there are several days for celebration
before then.
But many market strategists in Canada, while pleased with the conviction the rally showed
last week, are waiting a little longer before buying into the rosy scenario being painted by
some market pundits.
``We have all these gurus on CNBC calling for the worst is over,'' said Martin Roberge,
strategist at National Bank Financial in Montreal.
The series of soft numbers, which culminated with an extremely weak group of employment
data out of the United States, may be deceiving, he added.
``Over the last two years, there has been a natural tendency for the economy to slow in the
second quarter because Q4 and Q1 have been extremely strong over the last two years,''
Roberge said.
``But implicitly before buying the soft landing, one has to be aware of the recent experience.
After people bought the soft landing last year, we had 175 basis points (in rate rises).''
The slowdown may in fact have a lot to do with seasonal factors coupled with the tech stock
correction rather than being solely the responsibility of the Fed.
Buoyant tech stocks in the first quarter had keen amateur traders feeling wealthy on paper,
prompting them to spend more at the shopping mall and car dealership. When that bubble
burst, many investors clamped down on spending.
George Vasic, strategist and economist at Bunting Warburg Dillon Read in Toronto, shares
Roberge's cautious take on the recent good news.
``Two weeks ago, just after the Fed meeting, they hike 50 (basis points) and people
immediately concluded that they were far from done. Now they've come back to the original
view that perhaps they are done or very close to being done,'' he said.
Vasic believes that buying the slowdown scenario too soon is perilous. He thinks that the
jobs data released in June are likely to reverse much of the weakening trend.
And even if the economy continues to slow from a run to a walk, this summer's inflation data
are likely to become the new target of worry, with wages and prices looking less benign than
they have recently, he added.
``There's an implicit view that people have that when the Fed Funds peaks, it's going to
immediately start dropping. And our point would be that what the market needs to realize is
that it's going to stay at a plateau,'' Vasic said.
So while stocks may have a short-term celebration ahead of them, when the long, hot
summer settles in, equities are probably going to have to fight against higher bond yields
once again as the debt market starts to fret about inflation.
Both Roberge and Vasic see another 100 basis points of rate hikes in the future, although
there may be no rise at all in June after this run of weak economic statistics.
Kumar is firmly in a more optimistic camp, although he admits that stock gains this year are
unlikely to be enormous.
However, even if the slowdown tale told by this set of numbers is true, there are dangers
stalking the complacent investor.
If the economy is truly slowing down, the shopping spree that has swelled the bottom lines
of retailers and pumped up groups like auto parts may start to dwindle.
``The only thing to watch for is that the U.S. consumer is moderating, the Canadian
consumer as well, then the consumer cyclical stocks like retailing or forest products and
autos and those kinds of things are less attractive,'' Kumar said.
And as the spending dries up, investors will begin to worry about earnings slowdowns
coming into the autumn quarter. |
