The North American stock markets seem to be taking a breather after their significant rise in December. Economic data released in Canada and in U.S. continues to show that the economy in North America is recovering steadily, just at a slower pace than many investors would like to see. With all this good economic data being released over the last few weeks, why has the market slowed down during the first week of January?
Most analysts and investors know that the stock market is forward-looking. At times, the stock market can be the best indicator of future success or failure for the overall economy as it tends to look six to 12 months into the future and base its movement on what it sees. Thus, with that in mind, a lot of the positive economic data we are seeing has already been baked into positive results over the past few months. Therefore, news that was anticipated weeks or months ago is having little or a reverse effect on the stock market. Investors are selling into the good economic data and not doing as much buying. “Buy the rumour, sell the news” tends to happen frequently on Wall and Bay Streets.
Another possible explanation for the market’s struggles at this time would be a stronger U.S. currency. With much of the economic data getting better in the U.S., the dollar has risen as of late. As we know, a strong U.S. dollar is bad for oil, gold and commodities in general, since most of these items are sold in U.S. dollars. Therefore, the stronger the currency, the more expensive it is for investors to buy, resulting in investors beginning to look elsewhere. Gold, in particular, has been purchased by many investors as a hedge against the U.S. dollar. When individuals feel the U.S. greenback is not worth the paper it is printed on, they purchase gold as a hedge or an alternative. When the U.S. economy shows signs of strength, this causes investors to rethink their ideas of the U.S. currency and money tends to flow out of gold or metals and back into the U.S. dollar.
The sectors responsible for driving the Canadian stock market higher over the past few years have been energy, materials (gold and other base and precious metals) and commodities. This rise has been on the back of a weak U.S. dollar. If the U.S. dollar should continue to rise (which it has lately), then the market in the short term may have difficulty rising. This, in my opinion, is the main reason why the TSX has not risen as much today as it had at the end of last year.
As investors, we need to look beyond the short term and look at the broader picture, which is clearly positive. Today, we have accommodative fiscal and economic policies, both here and in the U.S. The U.S. currently has lowest interest rates ever, and Canadian rates remain quite low as well. The U.S. Federal Reserve is trying to spur growth by injecting more money into the economy and the U.S. has extended the Bush tax cuts for all income earners. I am not sure what other signs growth investors would like to see before they put more money to work in this market. In my opinion, the stock market still represents good value in many areas, and thus should be considered for investment dollars if individuals are looking for growth and can handle the risks involved.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
