March 1, 2011

Carrick: North American stock markets undeterred by yellow flags

March 1, 2011

All four of North America’s major stock market indices recorded their recessionary trough levels two years ago, in February 2009. Since then, NASDAQ has more than doubled (+102%), the S&P 500 has performed very well (+81%) and the TSX (+74%) and DJI (+73%) have also realized strong gains.

There is another way to look at the recoveries in the stock market indices. Versus peak-to-trough declines, October 2007 to February 2009, NASDAQ has made back 95% of its fall, the DJI 75% and the S&P 500, 73%.

The peak for the Toronto Stock Exchange (TSX) occurred a little later than for the three American indices, occurring in May 2008, as commodity prices stayed inflated through the summer of that year. The TSX has recovered 91% of its peak-to-trough decline.

In the U.S., corporate profits expressed in current dollars hit an all-time high in the third quarter of last year. The fourth quarter, when it is reported, is likely to show an eighth straight period of increase since the cyclical low in Q4 2008. The strength has come from exceptional productivity growth, whereby more has been produced by fewer workers, and from strong sales in some emerging markets such as China and India.

In Canada, corporate profits before taxes rose 18.4% in 2010 versus 2009. In the fourth quarter of last year, they were +9.0 versus the third, which translates to nearly +40% when annualized. By way of contrast, Canadian corporate profits fell 32.3% in 2009 year over year.

Much recent economic news has been encouraging. For example, U.S. motor vehicle sales in January continued along an upward path at 12.62 million units seasonally adjusted and annualized.

An improving auto sector has been one reason the Purchasing Managers Index (PMI) of the Institute of Supply Management (ISM) has been doing so well. The February reading for the PMI was 61.4%, up from 60.8% in January. The last time the PMI reached as high a level as 61.4% was in May 2004.

A yellow flag for the world economy is being waved primarily due to world oil markets. The uncertainty in several MENA (Middle East and North Africa) nations is adding an uncertainty premium to oil prices of $10 to $15 USD (U.S. dollars) per barrel. The rising cost of food and energy is reducing demand in other areas and lowering the world economic growth outlook.

For the full report by RCD-Canada’s Chief Economist, Alex Carrick, please click here.

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