Weekly Newsletter

The big picture
Stress test results revealed

On Thursday evening, the U.S. government’s long-awaited “stress-test” results revealed that 10 of the 19 largest U.S. banks would need a total of about US$75 billion in new capital to withstand losses if the recession worsened. Officials hope the tests will restore investors’ confidence that not all banks are weak, and that even those that are can be strengthened.

The findings show that the financial system, like the overall economy, is healing but not yet healed. Further evidence of economic healing this week included a Department of Commerce report of increased U.S. construction spending, a 3.2% rise in pending home sales and, according to ADP Employer Services, a decline in private-sector job loss.

On Wednesday, Bank of Canada Governor Mark Carney reassured a Senate committee that further stimulus measures would not be required. He predicted that, barring any economic “shocks,” growth will commence by year-end, and accelerate in 2010.

Thursday, the European Central Bank cut interest rates a quarter-point to 1%, and announced plans to buy US$80.2 billion in euro-denominated bonds in a bid to stimulate credit. The Bank of England held rates at 0.5%, but said it would step up its efforts to increase the money supply by US$75.4 billion.

The markets
Markets hit six-month highs

The S&P 500 surged 3.4% Monday, for a total increase of 34% since March 9, putting the index back in positive territory for 2009. Markets continued to charge ahead Tuesday and Wednesday, and the TSX moved above 10,000 for the first time in six months. The Canadian dollar also hit a six-month high, trading at US$85.42.

With a dramatically culled product line, food manufacturer Kraft posted a 10% profit in the first quarter, and said it is expecting to eat up more market share. Meanwhile, Canadian wireless leader Research In Motion announced an alliance with HP to expand functionality for its BlackBerry smartphones. In other news, Wal-Mart staked a claim in one of the world’s fastest-growing retail markets with a pilot program to open convenience stores in China.

Our recommendation
Position portfolios for the next cycle

• Equities. Stephen Uzielli, Portfolio Manager, Portfolio Advisory Group, believes the current strength in equities is getting somewhat extended and is merely a rally in a bear market as opposed to the beginning of the next bull market. We continue to advocate that investors take profits in long trading positions or overvalued holdings that do not represent long term, core holdings. In the event of an inevitable pull-back, return to selectively accumulating equity positions in anticipation of the next bull market for stocks.

• 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 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.