TORONTO — Gains could be elusive on the Toronto stock market this week after losing ground for a fourth week in a row amid concerns that indexes may have run up too fast in relation to the pace of the global economic recovery.
The TSX has slid following a rally that ran practically non-stop from early October to the beginning of March, taking the market up almost 14 per cent during that time.
Traders have been discouraged amid worries about slower than expected growth, reinforced last week by weaker than expected durable goods orders and a pair of regional manufacturing indexes, and they will be looking at key reports this week for reassurance on that front.
Top releases include the influential Institute for Supply Management report on U.S. manufacturing and minutes from the most recent interest rate meeting of the U.S. Federal Reserve on March 13.
The week concludes with the non-farm payrolls report for March and investors hope the data will show the American economy managed to crank out more than 200,000 jobs for a fourth month in a row.
“A little under 200,000 is possible but monetary policy has been pretty easy, the political turmoil has been dying down, the business environment has been pretty good, interest rates have stayed low, the confidence seems to only be improving so it’s not too bad,” said Colin Cieszynski, market analyst at CMC Markets Canada.
“We haven’t seen a spike in jobless claims so it would seem as though jobless claims have come down and stayed down so it would seem as they they are chugging along.”
The U.S. jobs data will be released Good Friday when markets are closed.
Canadian employment data also comes out on Thursday and economists expect the economy created about 10,000 jobs during March and a drop in the jobless rate of 0.1 per cent to 7.4 per cent.
“That would leave the year-to-date gain at 6,500, miles below last year’s near 75,000 surge over the same period,” noted BMO Capital Markets senior economist Benjamin Reitzes.
“Soft job growth is expected to persist through mid-2012.”
The Federal Reserve left interest rates unchanged at the end of its last rate meeting. Traders will be looking to the minutes from that meeting to get the central bank’s latest take on the economy.
They will also be looking for any hints that the Federal Reserve has any plans to help growth by launching another round of stimulus known as quantitative easing, which would see the Fed buy up more bonds, which helps to keep interest rates low.
However, while some recent economic data has missed expectations, the tone of reports has been generally positive, supporting the view that the global economy continues to recover at a slow but steady pace from the 2008 financial crisis and recession.
And some analysts point out that it is unreasonable to expect the Fed to stimulate an economy that is showing signs of improvement, albeit at a slower pace than thought.
“It doesn’t make sense for multiple reasons, one of them is the improving economy and second the upcoming election,” added Cieszynski.
“The Fed tries to not do too much in the political season (since politicians) can very quickly turn monetary policy into an election issue. And in a growing economy, you don’t want to be doing it because you run the risk of creating asset bubbles . . again.”
Meanwhile, the ISM’s manufacturing index for March is expected to show continued expansion but at a slightly slower pace. Economists expect the index to come in at 53.1, off a bit from February’s reading of 53.5.
The retracement on markets is likely to continue for a bit as markets head into the first quarter corporate earnings season, reflecting a slower pace of earnings growth.
“We have had a couple of years in which earnings rowth has trypically been in the double digits and exceeded expectations,” observed Robert Gorman, chief portfolio strategist at TD Waterhouse.
“But what you had very recently is analysts cutting back on earnings expectations. I suspect the Q1 numbers aren’t going to be as positive relative to expectations as we have had for quite a while. And I think this may cause some of that sober second thought and you’re seeing it creep in here.”
Not that he thinks markets are in for a serious correction.
“Certainly we’re not talking in my view bear market material, 20 per cent or anything like that,” he said.
“After having a tremendous run, which has seen sentiment very positive, we’re going to get a dash of cold water. Short term, we’re not timers but you have to look at these things and go, OK we will get the pause that refreshes here at some stage and I think that is where we are.”