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The Week

David Rosenberg on stocks: ‘3,339 sessions of no capital appreciation’ Add to ...

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Rosenberg on stocks
Economist David Rosenberg took an interesting look this week at the "myth of equities for the long run."

His calculations preceded Friday's rally, based instead on where things stood as of Thursday, but he was looking at the long term and the results didn't make a meaningful difference, anyway. Here's what he found:

  • The S&P 500 first hit Thursday's level of about 1,330 on April 8, 1999. "So what we have on our hands are 3,339 sessions of no capital appreciation but tons of volatility."
  • The S&P 500 peaked at its record 1,565 on Oct. 9, 2007. "That is 1,200 sessions in which a new high was never made - the hallmark of a secular bear market."
  • Since the "nearby high" this year of 1,419 on April 2, there have now been 71 sessions "without making even a new peak for the cycle."

"It's incredible how so many people people are still hyper-focused on missing short-term rallies - even the 2009-2010 bounce off the crisis lows (or the post-QE2 rally two years ago - shame!)," the chief economist at Gluskin Sheff + Associates said in a report Friday.

"Tell me, for the brave souls that caught the bounce, did they catch the 2007 peak?" he added.

"Do they realize that the Canadian stock market is back in a full-fledged bear phase and is down nearly 20 per cent from the nearby peak? Somehow, there is this notion among many investors that missing any upside rally is forbidden - far better to participate in a sell-off."

Whither central banks
Investors increasingly believe the world's central banks are running out of bullets or desire as the recovery stumbles.

Minutes of the last Federal Reserve meeting, released this week, showed a few members of the policy-setting panel wanted to take immediate action, but the others wanted to wait until there's more evidence that it's needed. Many investors were looking for another round of quantitative easing - dubbed QE3 - but the minutes suggested that, while open to the idea, it's not in the offing at this point.

So even though other central banks, such as those in Brazil and South Korea, cut their benchmark rates, markets were disappointed.

For the Bank of Canada, which meets next week and also releases its monetary policy report, there's a different situation.

"The Bank of Canada faces the same uncomfortable situation it faced last summer - whether to maintain a tightening bias supported by a still-healthy domestic economy or to move back to a neutral setting in appreciation of slowing global growth, the risk of deteriorating financial conditions and the potential spill-over into the domestic economy," said Mark Chandler, chief of fixed income and currency research at RBC Dominion Securities.

Mr. Chandler believes the central bank won't move from its current course, but it's a "very close call."

This means that Governor Mark Carney and his colleagues will remain ready to tighten monetary policy and hike their benchmark overnight rate, though not any time soon, and are not leaning toward a cut, as some observers believe.

Exactly when, and by how much, will depend on their forecasts for economic growth, among other factors.

"Global headwinds have pushed them to the sidelines in the near term and we do not anticipate that they will make their first move for another eight months or so," Mr. Chandler said, projecting a hike next March of one-quarter of a percentage point from the current 1 per cent.

"To get to that point, they have to retain faith that growth will be slightly above 2 per cent through 2013, even if only by a modest amount," he added.

"If that is their belief - as it is ours - then it makes sense to retain the 'soft' tightening bias they have in place (i.e. 'some modest withdrawal of the present considerable monetary policy stimulus may become appropriate')," he said, referring to the Bank of Canada statement.

Asia feels the chill
Asian economies are beginning to feel "the chill effects" of Europe's troubles.

Just a day after South Korea suffered a setback, China reported that economic growth slowed in the second quarter of the year to 7.6 per cent, compared to 8.1 per cent in the first three months.

Some observers don't believe Beijing's numbers by the way, thinking the growth rate was closer to 7 per cent.

And while either of those numbers seem like enviable growth, investors are counting on China to help pull the rest of the world out of its funk.

"The fact that Chinese GDP came in pretty much as expected at 7.6 per cent has lent a degree of support to equity markets today, however it can’t hide the fact that Asian growth is starting to feel the chill effects of events in Europe," senior analyst Michael Hewson of CMC Markets said Friday.

"Singapore Q2 GDP surprisingly contracted by quite some distance while the Bank of Korea followed yesterday’s surprise rate cut by trimming its growth forecast, for the second time this year, by 0.5 per cent to 3 per cent."

Chief economist Avery Shenfeld of CIBC World Markets, however, said he's not losing much sleep over China's performance.

"Unlike Europe, where policy makers have to be dragged into monetary stimulus and less fiscal austerity, or the U.S., where Bernanke has run out of bullets and fiscal policy is in a political logjam, China has the room and willingness to act," Mr. Shenfeld said.

"Monetary policy easing already has credit flows picking up, with loan issuance jumping 11 per cent from May to June."

What to watch for next week
All eyes will be on a report expected Monday from the Canadian Real Estate Association on how the housing market did in June. It's expected to show a cooling market.

"Early results from the largest cities showed activity was cooling even before the new tighter mortgage insurance kicked in on July 9," said deputy chief economist Douglas Porter of BMO Nesbitt Burns.

"Sales likely dipped from a year ago for the first time since April 2011, versus a 7-per-cent year-over-year rise in the first five months of 2012, he added.

"Similarly, prices probably slipped from last June’s level, echoing a reported decline in the prior month. We would stress that the reported decline overstates the weakness, as it largely reflects a deep sales slide in the country’s most expensive market (Vancouver). In fact, the vast majority of Canadian cities will still report modest price gains (with the notable exception of Toronto, where prices were still up more than 7 per cent last month)."

Markets will also be watching for inflation reports in Canada and the United States, and U.S. retail sales.

For investors, several major companies will be reporting quarterly results, including Citigroup Inc., CSX Corp., Goldman Sachs Group Inc., Intel Corp., Johnson & Johnson, Yahoo, American Express, Bank of America Corp., IMB Corp., Microsoft Corp., Morgan Stanley, Nexen Inc., Shoppers Drug Mart and General Electric Co.

Required reading this week
A dozen of the country’s most powerful financial institutions are on the doorstep of success in their 14-month quest to buy the owner of the Toronto Stock Exchange and reshape the business of stock trading in Canada. Boyd Erman looks at the Maple Group clearing its regulatory hurdles.

A bloody clash between protesters and police in Spain highlighted the growing pushback against the wrenching government austerity under way in much of Europe. Barrie McKenna reports.

Canada’s big banks are preparing to launch “virtual wallets” as early as this fall that will allow consumers to digitally consolidate their credit and debit cards from any financial institution, and use them to make purchases online and through their cellphones at cash registers, Grant Robertson writes.

The rate-rigging scandal now gripping the U.K. is crossing over to the U.S., complete with investigations, hearings, and a flood of lawsuits. Joanna Slater reports from New York.

There are some good reasons why a decline in houses prices won’t be so bad. Personal finance columnist Rob Carrick looks at five.

 

Follow on Twitter: @michaelbabad

 
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