Market sentiment is cool this week as some investor regret kicks in on the realization that stocks may be overvalued based on corporate earnings potential.
The drawn-out saga of the European debt crisis is now clearly taking a toll on stocks as investors realize that the recovery will be a rocky one at best.
“Investors had been extrapolating growth that was not sustainable. Now they are readjusting their growth expectations,” says Paul Vaillancourt, chief investment officer for Canadian Wealth Management, a Calgary-based boutique investment firm owned by Société Générale SA.
A major factor affecting valuations right now is the lighter-than-anticipated job growth in the U.S., a point driven home Friday with the latest employment data. In addition, while issues such as Greece’s financial troubles and new regulatory regimes for the global banking industry have been at least partially priced into the markets, other problems, such as the oil catastrophe in the Gulf of Mexico, are now sparking investor concern.
“The known unknowns are out there,” Mr. Vaillancourt says. “The markets right now are focusing on the unknown unknowns. We all know there are exposures to the Club Med countries. But the unknown is how widespread is this exposure.”
Meny Grauman, an economist with CIBC World Markets Inc., warned in a report last week that Canadian stocks are growing increasingly connected to economies beyond the United States. The domestic stock exchanges should not be thought of as a port in any storm, he said.
“Although recent financial shocks are increasingly centred far from North America’s shores, the TSX is likely to provide less shelter from global gyrations than it has in the past. Developments in Greece or Hungary may not have much of a direct impact on the Canadian economy as a whole, but are a growing factor in domestic equity returns nonetheless,” Mr. Grauman said.
Hungary’s new government is expected to release budget numbers this week that could clarify the severity of its financial problems, which an official on Friday warned mirrored those of Greece, sending a shudder through global stock markets.
Mr. Vaillancourt is advising his clients to invest their money for income for the time being, or as he puts it, “getting paid to wait.” Among stocks, he prefers companies that have sound balance sheets, some level of growth and decent valuations. He doesn’t believe that the wait will be too long, expecting markets to have re-priced themselves to a better place before the end of the year.
“We don’t believe we will see a double-dip recession, [because] the recovery has become self sustaining at this point,” he said.
Among the economic data being released this week, market watchers anticipate a slim decline in monthly Canadian housing starts and a slight narrowing of the merchandise trade balance. In the U.S., economists expect that new data on Thursday will show the U.S. trade deficit widened to a 16-month high last month. They are also expecting a moderate increase in U.S. retail sales for May.
