TORONTO — Stock markets appear set to build on the solid advance racked up in the first week of 2010 trading despite employment data that came out at the end of last week that widely missed expectations.
“This wasn’t enough to change people’s positive sense of the news that had come out earlier in the week, and so things are looking like they’re on an improving path,” said Norman Raschkowan, chief investment officer at Mackenzie Financial Corp.
Investors hope that a better-than-expected U.S. retail sales report coming out on Thursday will provide reassurance that the economy at least isn’t worsening.
The TSX ran up 1.76 per cent last week, while the Dow Jones industrials opened 2010 trading by gaining 1.8 per cent.
Markets were fired up early in the week after the Institute for Supply Management’s manufacturing index came in at 50.1, which shows the sector is expanding, albeit at a sluggish rate.
The reading demonstrated that the trend towards economic growth is intact, one reason that markets had a muted reaction to Friday’s jobs data from the U.S. that showed the American economy lost another 85,000 jobs during December. Economists had expected a flat showing, or perhaps a slight job loss of around 1,000.
But there were bright sides to the reports. Revisions to the previous two months’ data showed the U.S. economy actually generated 4,000 jobs in November, the first gain in nearly two years.
“We did see the November number get pushed into positive territory and I think what we do continue to see is that the trends are away from net job destruction towards job creation and when you look at other indicators of the labour market, they’re pretty good,” said John Johnston, chief strategist for The Harbour Group at RBC Dominion Securities.
“And when you look at the jobless insurance claims numbers, which continue to move in the right direction, they’re suggesting that the labour market still has some upside as we go into the new year. And that and the ISM manufacturing number suggest to me that growth is going to be stronger in the near term.”
And the jobs data also provided some reassurance that the U.S. Federal Reserve will be in no rush to raise interest rates.
“I’m surprised when the Fed continually says we expect interest rates to be low for an extended period of time and everybody still talks about, ’The Fed is going to raise interest rates,”’ said Johnston. “This number kind of puts the market back in line with what the Fed is talking about.”
Meanwhile, investors are looking to a positive reading on American retail sales during December, particularly after many big retailers reported a better-than-expected holiday shopping season.
Economists expect that U.S. retail sales advanced by 0.2 per cent in December, driven by higher vehicle sales. Ex-autos, sales were likely flat.
“The holiday shopping season appears to have been a bit better than expected (although the bar was set pretty low),” observed a commentary from BMO Capital Markets.
“Lessening job losses are no doubt easing some of the income headwinds on consumer spending, although the credit headwinds show no signs of dissipating any time soon.”
Last week’s stock market gains followed a year when many investors were able to claw back some of the huge losses resulting from the 2008 financial market meltdown. The TSX ran ahead 31 per cent, and the S&P 500 index surged 23 per cent, in 2009.
However, analysts warn that gains this year will be harder to get, mirroring the weak economic growth that is expected as Canada and the U.S. dig themselves out from severe recessions.
“This is sort of a sawtooth market where you will have the market up and then at some point there will be some news that gets people uneasy and the market will trade off and start higher again and it will be this up and down — but with an upward slant,” said Raschkowan.
“At the end of the year, we will probably find that it’s sort of an average-type year with gains in the high single-digit, low double-digit sort of return.”