The Toronto stock market is starting the week stuck below where it started the year and analysts say the TSX has some tough obstacles to overcome before it can end 2010 with a positive showing.
And with the main index down 79 points or 0.67 per cent year to date, it’s a pretty challenging set of circumstances.
Investors are hoping that the government debt crisis in Europe doesn’t push the continent back into recession, the U.S. economic recovery will pick up its pace and China doesn’t slow its economy too much.
In the short-term, investors should probably brace themselves for more selling pressure.
“With all the good news known, and the bad news not fully comprehended, (stock) prices probably need to come down,” said John Johnston, chief strategist, The Harbour Group at RBC Dominion Securities.
“I think it could be quite a volatile summer.”
The worry is that a relatively mild, mid-cycle correction could turn into a bear market.
Johnston noted that “a lot of people are targeting a level of 950 on the S&P 500 index, which I think works out to about 10,000 on the TSX, which puts it at a 22 per cent decline (from the highs of the year registered in late April).”
The European crisis started out as a big question mark as to whether Greece could repay its debt and has grown into worry about whether deep spending cuts could endanger a global economic recovery.
“It’s feeding back into the banking system, you are starting to see funding pressures emerge, (some) European banks are having trouble raising money in the commercial paper market,” Johnston said.
Layered on that is concern about whether the European Union could deal with a crisis involving their big banks.
“We don’t know,” said Johnston.
“There’s a bunch of what I would classify as we know what the issues are but we don’t know how bad they are going to be.”
Markets saw some relief last week that China growth can stay strong while the government keeps a lid on inflation when data showed May exports up almost 50 per cent.
That was particularly good news for the resource-heavy TSX, which has been particularly hard hit by declines in the mining sector as demand from China had fallen off while the country’s industries eat their way through inventories.
“Commodity prices have been flat except for gold for a good chunk of this year so we need to see some kind of more signs that the global economy and the global recovery is regaining traction because the thing that’s held back commodity prices is, how badly are the wheels going to fall off (in Europe) and is China going to pull back as well,” said Colin Cieszynski, market analyst at CMC Markets.
Pessimism has been deepening about the American economy in the wake of a poor employment report for May, along with a surprisingly large drop in retail sales during the month.
Johnston pointed to jobless insurance claims numbers in the U.S. which have been flat all year, in contrast to a year ago when the TSX was on its way to 31 per cent gain last year on signs of “green shoots”, or early indicators the economy was improving.
“The old rule of thumb was 200,000 initial claims each week is a boom, 400,000 is a bust and we’re stuck at 450,000,” he observed.
“That’s not a good sign. So I think that it tells us that US growth rate next year is going to be below where it is now. And that consensus expectations on growth and probably earnings for 2011 are too high.”
Markets could find some lift in another month when companies begin reporting second-quarter earnings.
The first-quarter earnings were overwhelmingly positive, but results tended to get muted on many days as they competed with a run of bad news from Europe.
“Most strategists and equity analysts have been factoring in a weaker second half into their forecasts, everybody was looking for that at the beginning of the year for a strong first half, weak second half,” said Steve Uzielli, portfolio manager, director Scotia McLeod Equity Advisory.
“If the weak second half in terms of corporate profitability is actually better than expected, that can lift the market.”