February 14, 2014

Among stock market indices, only the TSX advanced in January

In December of last year, stock market investors were spoiled. The three major U.S. indices advanced right through the final day of the year.

Dow Jones Industrials (the DJI) and the S&P 500 both set new all-time highs on 2013’s last trading day. NASDAQ reached its best level in 13 years.

In the first month of this year, the party atmosphere was replaced with a hangover.

On a month-to-month basis, the DJI dropped the most, -5.3%, followed by the S&P 500, -3.5%. NASDAQ’s step backwards was a relatively modest -1.7%.

Only the Toronto Stock Exchange ended January 2014 higher than December 2013, although the increase (+0.5%) was quite small.

The DJI and S&P 500 are still far above their previous all-time peaks. But caution has crept in through some cracks in the economy’s foundations.

The Federal Reserve’s “tapering” of bond purchases is creating havoc for emerging nations. The expectation of gradually rising interest rates in the U.S. is causing currency values to plunge in some under-development nations such as Turkey and Argentina.

Also, the outlook for China has taken a hit. International investors have become worried about that nation’s “shadow” banking system.

This concern hasn’t arisen out of nowhere. Analysts have known for years that much of the lending activity in China is shaky. That’s what happens when lenders and borrowers aren’t operating in a free market economy — distortions (i.e., bad decisions) can quickly proliferate.

In the past, the anxiety has always been quickly dismissed by saying Beijing — with a huge treasure chest of foreign currency earned through export sales — will have little trouble coming to the financial sector’s rescue.

That’s the theory. It may soon be tested.

Also, some of the latest key statistics on the U.S. economy have taken a detour.

U.S. “real” (i.e., inflation-adjusted) gross domestic product (GDP) growth in full-year 2013 was +1.9%, almost the same as 2011’s +1.8%, but less robust than 2012’s +2.8%.

Annualized real GDP growth in last year’s fourth quarter was a sprightly +3.2%; but in the period before, it had been +4.1%.

The Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) in January eased to 51.3% from 56.5% in December.

Whereas December’s PMI reading corresponded with a 4.6% annualized rate of real GDP growth, January’s level points to a slower 2.7% gain.

U.S. motor vehicle sales in December fell back to 15.4 million units, seasonally adjusted and annualized rate (SAAR), according to Autodata Corp.

A heavier foot on the accelerator in November produced sales of 16.4 million units (SAAR), a post-recession high.

U.S. initial jobless claims in the latest week ending Jan. 25 flew up to 348,000, from better readings of 329,000 the week before and 325,000 two weeks prior.

Given the gloomier U.S. numbers, what’s making share prices on the TSX more alluring?

The lower-valued Canadian dollar will help energy companies generate higher profits, since the product they sell is priced in greenbacks.

The northern portion of the Keystone XL pipeline extension has just passed scrutiny from the U.S. State Department. If built, it will have minimal additional harmful impact on the environment, and less than other means of moving bitumen, such as by rail.

That doesn’t mean President Barack Obama will immediately issue a “green light” for the project. He’s still considering the political implications of agreeing to something the Republicans so fervently believe will be beneficial. Maybe there’s a bargaining chip to be played, when the debt ceiling debate begins to percolate again.

The State Department’s assessment is one more rebuttal of the often exaggerated claims made by those who wish to obstruct development and restrict future employment opportunities.

Oil has begun to flow through the recently-completed southern portion of TransCanada’s pipeline from the logistical hub in Cushing Oklahoma to the Gulf Coast.

The improved access to offshore markets has already lifted the price of heavy oil closer to the benchmark levels for West Texas Intermediate and Brent Crude.

This will provide an additional boost to the profits of Canadian firms producing Western Canadian Select.

Finally, I don’t want to close without saying a few words about NASDAQ, the home of many trend-setting knowledge-based firms.

Among North America’s four major indices, it has fallen the least relative to its 52-week high.

The U.S. is the world leader in technology development. Proof of this can be found in the most unlikely of places.

During the weekend leading up to the Super Bowl, one particularly interesting news story briefly bumped the Broncos and the Seahawks from the headlines.

It seemed to have particular relevance for Canadians living through one of the toughest winters, weather-wise, in decades.

There were reports that ice fishermen in Minnesota were able to replace their beer supplies by means of a unique delivery system — the use of automated flying drones.

When this became public, the Federal Aviation Authority (FAA) immediately shut down the practice.

Nevertheless, how can one not admire the ingenuity?

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.

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