Glimmers of hope continue to shine Monday, May 04, 2009

Market Watch: The big picture - Glimmers of hope continue to shine

Despite a 6.1% contraction in U.S. real gross domestic product (GDP) in the first quarter, encouraging signs have emerged this week. Tuesday's Conference Board index revealed U.S. consumer confidence is at its highest since November, while on the same day, Standard & Poor's Case-Shiller home price index reflected an increase in stability of U.S. housing prices. Meanwhile, the U.S. Federal Reserve announced no further changes to monetary policy following its meeting, indicating that the pace of economic contraction is continuing to slow and suggesting that the worst now may be behind us.

Mindful of our southern neighbour's missteps, on Tuesday Bank of Canada Governor, Mark Carney, cautioned the House of Commons to remain prudent, saying that crises are very difficult to predict, and warning that "One should never assume that because it hasn't happened that it won't happen."

The markets
Swine upsets bull

Fears of a global swine flu outbreak took its toll on markets this week, dragging the TSX down a couple hundred points over Monday and Tuesday. The impact was also felt across everything from livestock futures to the Mexican peso to airline stocks, as traders worried that consumers would rein in spending on travel and food perceived to be less safe because of the outbreak.

Shoppers Drug Mart reported a strong 6.1% boost in first quarter profit, attributing it to a boom in prescription sales. Other companies posting first quarter profits included Bristol-Myers, Whirlpool and Corning. Meanwhile, Bombardier Inc. won a $1.2-billion contract to build 204 streetcars for the City of Toronto. The order is expected to have a substantial positive impact on employment for workers at the Thunder Bay, Ontario, plant.

Chrysler became the first-ever major U.S. automaker to file for bankruptcy protection. The company announced it will temporarily halt most of its vehicle production while it completes a deal with Italian carmaker Fiat designed to revive its tattered fortunes. The Canadian government, along with the province of Ontario, will provide $2.42 billion in financing to assist with the restructuring process.

Our recommendation
Review portfolio allocations for suitability

* Equities. Economic statistics are anticipated to be at their worst over the next several months and Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, suggests that in response to any negative market reactions, investors should be selectively building equity positions in quality companies to position portfolios for the next cycle.

* Fixed income. Chris Kennedy, Associate Director, Portfolio Advisory Group, says high-quality corporate bonds, such as Canadian banks and insurance companies, continue to offer attractive yields relative to government issues. Although credit spreads have tightened significantly, they still remain wide, and we recommend that investors following the laddered portfolio process add exposure to these sectors when rolling maturities at this time.

* Portfolio strategy. With volatility still at record highs, it's important to review the impact on your portfolio allocations and ensure that your holdings remain appropriate for your goals and risk tolerance.



The month in review
April: Green shoots of growth

April saw a number of encouraging economic signs emerge, largely thanks to the unprecedented, aggressive measures taken by global leaders to bolster the world's economy. In addition, a number of individual businesses reported encouraging developments, such as a 26% jump in earnings for Canadian technology leader Research In Motion, and word that Goldman Sachs will repay its government bailout funds much more quickly than initially planned.

Market rally stumbles

The market's stunning seven-week, 30%+ rally began in March and continued into early April. After pulling back 4.3% in second-last week of the month, the S&P 500 regained 4.1% to end the week down only 0.4%. Markets went on to finish the month of April on solid ground, with a string of better-looking economic data providing support over the last two weeks of the month.

Bank rates reach new record lows

In the first week of April, the European Central Bank surprised financial markets by cutting its main interest rate to a record-breaking 1.25%. Meanwhile, the holdout Reserve Bank of Australia finally slashed its rate to 3%. Late in the month, the Bank of Canada (BoC) cut its key lending rate to a record 0.25% after acknowledging that previous forecasts of a swift recovery may have been too rosy.

China set to grow

The World Bank said that China is likely to emerge from its economic slump this year. "A recovery in China-fuelled largely by the country's huge economic stimulus package-is likely to begin this year and take full hold in 2010, potentially contributing to the region's stabilization, and perhaps recovery," the bank said in a statement.

Strong numbers met with caution

Positive economic indicators were noted in housing, unemployment and consumer spending this month, with a broad consensus forming among officials and economists that, even if we are not yet seeing a rebound, the rate of economic decline is certainly slowing. However, despite this consensus, warnings were issued by both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) that grave risks remain, and the end of present economic difficulties is still nowhere in sight.

Deals made and lost

French energy concern Total saw its $830-million bid for UTS thwarted at the end of April due to a lack of shareholder approval. After scrapping plans to buy Sun Microsystems this month, tech giant IBM raised its dividend by 10% and announced it will repurchase $3 billion of its stock in an effort to maintain investor confidence. Meanwhile, General Motors announced a novel partnership with Segway, maker of the upright, self-balancing scooters, to build a new type of two-wheeled vehicle designed to move easily through congested urban streets.