June 28, 2012
North America’s stock markets took a licking in May
Chief Economist, CanaData
North America’s four major stock market indices — Dow Jones industrials, the S&P 500, NASDAQ and the Toronto Stock Exchange (TSX) — took a licking in May.
They all fell between 6% and 7% in the month. Worries over the Greek election, slowing world growth and continuing soft U.S. jobs numbers took their toll.
Over a longer time horizon, the performances of the four major indices have not been equal.
The U.S. indices have performed relatively better than the TSX. The U.S. corporate sector has continued to report strong profit figures.
This has been particularly apparent in the high-tech sector where industry-leader Apple Corporation can seemingly do no wrong these days.
May’s month-end closing levels were -0.3% for NASDAQ, -1.4% for the DJI and -2.6% for Standard & Poor’s versus May 31 of last year.
That left the Toronto Stock Exchange as the clear loser, at -16.6% year over year.
The Toronto Stock Exchange is dominated by firms in the resource sector as well as in financial services.
The major banks in the country are having trouble realizing significant profit growth.
The current regime of ultra-low interest rates does not support their business model.
A couple of “mortgage wars” in recent months — whereby certain banks lowered their rates to solicit business — had to be quickly abandoned when the cost to the bottom line turned out to be prohibitive.
As for resource sector stocks, the TSX is perhaps being unfairly punished on account of the wobbly world economy.
Commodity prices are being perceived as weaker than they actually are.
The Bank of Canada (BOC) is a primary source of data on raw material costs. It publishes weekly, monthly and annual series.
Energy products are the major source of the decline in overall commodity prices.
The BOC’s energy sector sub-index is down 52% versus its pre-recession peak in the summer of 2008 and -24% versus its post-recession high in April of last year.
(The euphoria about the recovery in April 2011 was short-lived. Among the ensuing blows to the economy were the Tsunami in Japan and the uprising in Libya.)
The flip side of the energy price picture, however, is that they are still 49% above their recessionary trough level reached in February 2009.
Currently, the energy sub-index is being mainly influenced by the global price of oil, since natural gas prices have struck bottom and taken up semi-permanent residence there.
The BOC’s commodity price index excluding energy reveals a more bullish picture.
Its most recent peak — which can also be described as its post-recessionary peak — occurred in April 2011 and was actually higher than its pre-recession pinnacle in June 2008.
May 2012’s value of the total index excluding energy was only -2% versus its pre-recessionary peak and -6% versus its post-recessionary peak.
Compared with its recessionary trough level, the total index excluding energy in May was +41%.
That implies considerable underlying strength in commodity prices.
Both the agricultural and metals and minerals sub-index series reached levels in early spring of last year that were higher than their pre-recession peaks.
In the intervening 13 months, agricultural prices have softened by only 5% and metals and minerals prices by only 14%.
The use of the word “only” is deliberate. The -5% and -14% figures are small percentage changes in markets that can have wildly gyrating price swings.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog.
*Each month’s closing figure versus the February, 2009 closing figure for the index. February 2009 was the most recent trough for all 4 indices.
Data sources: NYSE, NASDAQ, TSE and Reuters. Charts: Reed Construction Data - CanaData.
