Markets set for further gains

Stock markets look set to rack up another week of gains as investors anticipate more pleasing earnings from the Canadian corporate sector and take comfort from signals showing better economic conditions.

TORONTO — Stock markets look set to rack up another week of gains as investors anticipate more pleasing earnings from the Canadian corporate sector and take comfort from signals showing better economic conditions.

Indexes jumped smartly last week, with the TSX ahead xxx per cent and the Dow industrials up 2.92 per cent to their best levels since September, 2008.

Investors bid stocks higher as the Federal Reserve offered more measures aimed at helping a faltering economy, the U.S. election delivered few surprises, manufacturing data from China and the U.S. came in better than expected and to cap it all, October job creation in the U.S. came in better than expected.

“The election outcome was in line with market expectations and the Fed was in line with market expectations, the economic data was generally much stronger than expected, even the auto sales numbers which in October hit a post cash for clunker high of 12 million,” said John Johnston, chief strategist, The Harbour Group at RBC Dominion Securities.

“So what you’re seeing (is), we’re in a slowdown and the underlying measures of economic activity are showing firming.”

As the Canadian earnings season winds down, investors will take in earnings from some of the biggest Canadian companies in the resource and consumer sectors.

Equinox Minerals (TSX:EQN), First Quantum Minerals (TSX:FM), Shoppers Drug Mart (TSX:SC) and Canadian Tire (TSX:CTC.A) are among the companies reporting near the end of what has been a positive season.

Marco Li, senior investment analyst at MFC Global Investment Management, said with about 105 companies reporting so far, about 34 per cent have beaten expectations, 34 per cent have met and 31 per cent have missed expectations.

There has also been good news on the dividend front, with WestJet (TSX:WJA) announcing it will institute a dividend for the first time, and Telus Corp. (TSX:T), DundeeWealth Inc. (TSX: DW) announcing increases in what they will pay to shareholders.

But he said there has been one important element missing.

“We haven’t seen… lots of estimate revisions to the upside,” he said.

“Only 46 per cent have raised their numbers of the 105 companies reporting, 43 per cent (have lowered) so it’s pretty neck and neck. And so, for a big leg up, we need to see estimate revisions basically on the upside.”

Stock markets are holding onto strong gains which started to add up after Fed chairman Ben Bernanke said at the end of August that the Fed was prepared to do whatever was necessary to keep the recovery on track.

Since then, the TSX is up more than eight per cent while the Dow industrials have run ahead more than 13 per cent.

Investors were particularly relieved after the U.S. Federal Reserve announced Wednesday that it will buy US$600 billion in government bonds over the coming eight months in a fresh attempt to energize the U.S. economy.

The measure is known as quantitative easing, which is aimed at creating more dollars and increasing the supply of money in the economy. The latest round of stimulus, known as QE2, involves the Fed buying US$75 billion in Treasury bonds per month until June next year.

The Fed hopes that the policy will help drive down interest rates and encourage lending.

With stock markets up so much in such a short period of time, investors wonder if the rally is looking stretched.

But Johnston believes that while a pullback is likely, it’s probably nothing to worry about.

“The pullback will be very shallow,” he said, because the recent strong economic numbers send a signal that people are waiting for the pullback to buy more stocks.

“We’re in a cyclical bull market and the economy is now starting to confirm the rally that started back in July but really started getting going on August 27th when Bernanke made his speech. And that was a watershed.”