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Uncertainty about the world economy has turned stock markets volatile

08/16/2011 by Alex Carrick, RCD Canadian Chief Economist

The economic situation in many parts of the world has become more uncertain. Doubts about the world recovery have rendered major stock markets more volatile. This has been most evident in the first two weeks of August.

The major catalyst for the wide swings in equity prices came after Standard & Poor’s downgraded U.S. debt from AAA to AA+.

Other concerns have also played roles, including ongoing debt problems in Europe and questions about the future strength of China’s economy, given the monetary tightening that has been imposed by Beijing to stem inflation.

Lately, stock market investors have been taken on a roller coaster ride and the plummets still haven’t been matched by the ascents.

The U.S. debt downgrade wasn’t a total surprise. U.S. finances have been taking a beating over the last several years. Spending well in excess of revenues was becoming entrenched.

Nevertheless, the reason for the downgrade appears to be more subtle. According to accepted measures of sovereign debt and deficits – e.g., both as percentages of GDP – the U.S. has not gone that far astray.

Its debt and deficit metrics are certainly nothing like as bad as in the three most shaky governments in Europe – Greece, Ireland and Portugal.

Furthermore, the U.S. economy is still by far the world’s largest. Consequently, it has the potential to easily outgrow its current financing dilemma, given a little luck and proper policies.

Therefore, the downgrade has taken on the nature of a censure over the way business is conducted in Washington. Confidence has been lost that legislators and the Executive Branch can work together to resolve problems and find solutions.

Party positions have become too entrenched and traditional means of achieving compromise are no longer working.

The resulting state of near paralysis has cost the country its first downgrade in history.  The embarrassment factor alone sent stock prices tumbling.

The slowing in the world economy has caused Canada’s major exchange, the TSX, to lose even more ground than indices south of the border. That effect has come mainly from commodity prices, and even more specifically the world price of oil.

With the price of oil back into the mid-$80 U.S. range per barrel, down from $110+, Canadian resource stocks have lost some of their allure. Gold stocks are another matter, since the price of that precious metal keeps setting new records.  

As for some of the most recent statistics on the economies north and south of the border, many of the results are mixed.

The U.S. picked up 117,000 jobs in July, a decent-enough advance, and the latest weekly jobless claims figure was a low 395,000, also a move in the right direction.

U.S. retail sales in July at +0.5% month to month and +8.5% year over year were more than encouraging (i.e., +5% year over year is a strong performance), but housing starts continue to disappoint. They were flat in July versus June and residential building permits (-3.2% month to month) give no indication of an imminent improvement in job-site activity levels.

In Canada, home starts have remained remarkably strong. In July, they climbed above 200,000 units again, seasonally adjusted and annualized. New home prices continue to advance. In June, they were +0.3% month to month and +2.1% year over year.

But all isn’t perfection north of the 49th parallel. Jobs growth stalled in July and sales by manufacturers have been trending down for the past three months. Canada’s merchandise trade position, historically a significant contributor to GDP growth, remains locked in deficit.

Given the prevailing mood, with so much uncertainty weighing on people’s minds, the benefits of good news for stock markets will accumulate only gradually. But in the short term, at least, each dollop of bad news is likely to be blown out of proportion.

Stock exchanges - performances of key indices - July 29, 2011
INDEX 52-WEEK LOW 52-WEEK HIGH YEAR AGO
(JUL 30, 2010)
MONTH AGO
(JUN 30, 2011)
Latest Month-end Closing Prices
(JUL 29, 2011
  PER CENT CHANGE,
LATEST VERSUS
52-WEEK LOW 52-WEEK HIGH YEAR AGO MONTH AGO
Dow Jones Industrials
NYSE (^dji)
Aug 31 10 9,916 May 2 11 12,928 10,466 12,414 12,143 22.5% -6.1% 16.0% -2.2%

S & P 500
NYSE (^gspc)

Aug 27 10 1,040
May 2 11 1,371 1,102 1,321 1,292 24.2% -5.8% 17.2% -2.2%
NASDAQ
(^ixic)
Aug 27 10 2,099
May 2 11 2,888 2,255 2,774 2,756 31.3% -4.6% 22.2% -0.6%
S & P/TSX Composite
TSX (^gsptse)
Aug 25 10 11,469
Mar 7 11 14,329 11,713 13,301 12,946 12.9% -9.7% 10.5% -2.7%
Sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Table: Reed Construction Data – CanaData.
Performances of key stock market indices
Performances of key stock market indices
*Each month's closing figure versus the February, 2009 closing figure for the index. February 2009 was the most recent trough for all 4 indices.
The Key Stock Market Indices are:
1) New York Stock Exchange - Dow-Jones Industrials (30);
2) New York Stock Exchange - Standard and Poor's (S & P) (500);
3) National Association of Securities Dealers Automated Quotations - NASDAQ Composite Index;
4) Toronto Stock Exchange - S & P/TSX Composite.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Chart: Reed Construction Data – CanaData.
S & P/TSX Composite
Toronto Stock Exchange
S & P/TSX Composite
New York Stock Exchange - Dow-Jones Industrials (30)
New York Stock Exchange - Dow-Jones Industrials (30)
New York Stock Exchange - Standard and Poor's (30)
New York Stock Exchange - Standard and Poor's (30)
NASDAQ Composite
(National Association of Securities Dealers Automated Quotations)
NASDAQ Composite
The charts show month-end closing figures.
Data sources: New York Stock Exchange (NYSE), Standard and Poor’ s (S & P), National Association of
Securities Dealers Automated Quotations (NASDAQ), Toronto Stock Exchange (TSE) and Reuters.
Charts: Reed Construction Data – CanaData.

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