TORONTO — Stock markets could be under pressure this week as traders get back to work after Labour Day without a hoped-for catalyst that might drive the six-month old rally even higher.
“The direction is still up in the air,” said Blair Falconer, portfolio manager at HSBC Securities.
“The big worry for the next little while is just going to be, are we going to give back the rally from the summer or can we continue it in the fall?”
Stock markets ended the week modestly higher following more glimmers of good news that indicate the recession is ending.
The major report for the week was employment data, from Canada and the U.S. The Canadian report showed job gains of 27,100 last month, however, they were in services and part-time positions.
A positive report from the U.S. showed the economy lost 216,000 jobs last month, slightly better than predictions of around 225,000.
Earlier in the week, Statistics Canada announced the Canadian economy grew in June after almost a year of contraction rising 0.1 per cent.
In the U.S., the Institute for Supply Management, a trade group, reported that the manufacturing sector grew in August for the first time in 19 months, and its service sector index rose to 48.4 last month, the highest level in nearly a year.
American home sales, meanwhile, have increased for several months and prices are stabilizing.
But with major indexes up well over 40 per cent from the lows of early March, investors are demanding more proof that the economic recovery will be strong enough to justify that sharp runup.
“There was a time probably in April and May when the markets would absolutely rip based on these green shoots,” said David Rosenberg, chief economist and strategist at Gluskin Sheff.
“And now we’re more or less levelling off and it’s telling you that this is a market that is fully priced at the present time.”
And the latest data, while better than the huge monthly job losses of half a million and more a few months back, do not indicate a pickup in job growth, which would in turn stimulate consumer spending, an important component in any U.S. recovery.
“There is nothing in the leading indicators telling you that we’re getting meaningful improvement,” said Rosenberg.
“The jobless claims, the best you could say is that we’re no longer at the peak but those peaks were occurring when the economy was contracting at a six per cent annual rate. Temp agency employment is going down, albeit at a slower rate, (and) there is actually action in terms of expanding the work week, which is what you would like to see because companies will boost hours before they boost the bodies.”
Rosenberg said this adds up to a situation where the most positive point of view is that the economy is no longer contracting and no longer is the labour market shedding jobs at the rate it was during the first half of this year.
“That was an exciting story, back when the S&P 500 was around 700,” he said, “at 1,000 (its current level) it’s actually a tired tale.”
Rosenberg observed that the market rally means that the market has become priced for a gain of about four per cent gross domestic product growth in the U.S. next year.
“And the reality is that without positive job growth, we’re going to just have to see gargantuan productivity gains to generate the sort of economic performance that’s imbedded in the equity market right now,” he said.
Rosenberg added that it doesn’t pay to view the Canadian economy in a rosy light just because the August jobs report surprised on the upside.
“People forget that we had an extremely weak number in July, far weaker than expectations, so August was better than expectations,” he said.
“The truth is somewhere in the middle — the economy here is not creating jobs despite one data point. You look on a smoothed basis and we’re losing roughly 20,000 jobs at a month.”
This lack of a catalyst to take the market higher is also coming at a volatile time of year as September and October have well-deserved reputations for being negative.
“The key question is going to be, what is the outlook for the fourth quarter?” said Rosenberg.
“And I think that we’re going to be past this temporary period of ramped up auto production, we’re past the cash for clunkers, and my sense is that we are going to see a very sluggish economic performance in the fourth quarter. And that’s not priced in right now so for a stock market (expecting) four per cent growth, the fourth quarter might offer up a downside surprise.”