The Toronto exchange managed to keep losses at less than 1 per cent last week.Deborah Baic/The Globe and Mail
After showing their resiliency last week, Western markets will be tested again as historic events play out in the Middle East and North Africa, Japan and Europe.
In the case of Japan, strategists are making some cold calculations on the humanitarian crisis. The worst case contemplates a full nuclear meltdown leading to a massive displacement of people and businesses, and widespread supply disruptions for the technology and auto industries.
A more optimistic viewpoint has Japan facing radiation leakage and power disruptions that prevent manufacturers from operating for only a few months: Global supply lines face interruptions and Japanese demand for discretionary goods falls, but the overall damage to the global recovery remains manageable - perhaps shaving a fraction of a percentage point off global growth.
Jack Ablin, chief investment officer of Harris Private Bank in Chicago, considers the latter scenario most likely at this point.
"I have knocked down my forecast for the U.S. as a result of Japan and compounded by events in the Mideast," he says.
Mr. Ablin is now forecasting that S&P 500 companies will grow their revenue 4.5 per cent this year, down from 5 to 5.5 per cent. As a result, he has also trimmed his expectations for stock prices to 7.5 per cent this year, less than the 9.4 per cent he originally anticipated.
"Our asset mix has not changed as a result of the Japanese crisis," he says. But his investment plan has. With his S&P price targets lowered, he says he will begin reducing his exposure to equities sooner.
Hanging over the market is the spreading turmoil in the Middle East. Investors are concerned about how quickly violence is spreading from Libya to Bahrain and Yemen. At this stage it appears unlikely that oil supplies will be disrupted, but the risk grows as more states are swept up by the revolutionary fervour, with Saudi Arabia's fate the key.
In the European Union, officials are about to run into a self-imposed deadline to hammer out a solution to the sovereign debt crisis. The stronger states, led by Germany, are pushing what they call a "grand bargain," offering to increase the emergency bailout fund by some €440-billion ($613-billion) in return for the weaker members imposing stringent fiscal terms.
The common currency won't collapse without a deal - at least not yet. However, without measurable progress Europe's financial mess could start to upset global markets once again.
Britain, which sits outside the euro zone, will set the tone for austerity on Wednesday when its coalition government delivers an annual budget that is expected to continue the attack on the nation's deficit.
U.S. stocks declined about 2 per cent during last week's mayhem, while Toronto and London exchanges managed to keep losses at less than 1 per cent. Asia, of course, was a different story, with Japanese stocks down 9 per cent and Hong Kong's Hang Seng index off 4 per cent.
David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates Inc., says the forward momentum that global stock markets have shown since last summer has been broken.
"Combining all of the developments that have taken place, we are faced with a very confusing investing environment," he wrote in a note to clients.
To try to make some sense of it, he turns to technical analysis and concludes that the "minimum retracement expectation of the July-February rally" translates into the S&P 500 falling to 1,217 points. It closed Friday at 1,279.20. A more common retracement pattern would suggest a decrease to slightly below 1,140, he said.