By John Heinzl
The Globe and Mail
Report on Business
Tuesday, June 13, 2006
It's official: We're in a correction.
Yesterday's 193.12-point or 1.7-per-cent tumble on the S&P/TSX composite index -- the sixth drop in a row -- is remarkable not only because it sent the benchmark into negative territory for 2006
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Commodities are the ones that are driving the market at the moment.”
It also brought the S&P/TSX's drop from its record high in April to more than 10 per cent, which is the usual definition of a correction.
If that's not bad enough, "this correction is not over yet," National Bank Financial chief economist Clément Gignac and assistant market strategist Pierre Lapointe said yesterday, noting the Canadian market's heavy exposure to volatile commodities and a global flight away from risky investments.
A correction was long overdue for the S&P/TSX, which until recently was riding the commodity boom to record highs. According to National Bank Financial, 959 trading days have passed since the market's previous correction in 2002 -- the longest stretch without a 10-per-cent drop in 35 years.
But now that central banks are raising interest rates and fears of a global economic slowdown are hammering commodity prices, the S&P/TSX is in full retreat.
"Commodities are the ones that are driving the market at the moment," said Adrian Mastracci, president of KCM Wealth Management in Vancouver.
In the past six trading days alone, the S&P/TSX has plummeted more than 700 points, or nearly 6 per cent.
Yesterday, resource stocks were again among the biggest losers, as the TSX's golds, materials, and metals and mining groups each tumbled more than 4 per cent and energy dropped more than 3 per cent.
Hedge funds and other speculators had charged into commodities earlier this year, pushing prices skyward. But now that speculators are taking profits, "there's air going out of those sectors," said Greg Eckel, senior vice-president at Morgan Meighen & Associates in Toronto.
Gold, for instance, has dropped for four weeks in a row and is down 16 per cent from a 26-year high of $732 (U.S.) an ounce last month. Copper has fared even worse, sinking 20 per cent from its record high in May. Crude oil is down nearly 7 per cent from its April peak.
Canada isn't the only market getting hammered. According to data cited by National Bank Financial, investors have pulled about $8.4-billion out of emerging markets in the past three weeks.
"With all major central banks tightening in sync for the first time in 15 years, some investors are running for the exit," Mr. Gignac and Mr. Lapointe said.
But profit good times roll
The stock market may be falling apart, but corporate profits are expected to continue rising.
With about three weeks left in the second quarter, earnings for Standard & Poor's 500-stock index companies are expected to grow at an 11-per-cent clip from the same quarter a year earlier, according to Thomson Financial.
It would mark the 12th consecutive quarter in which profits have risen more than 10 per cent, a feat that hasn't happened since a streak of 13 double-digit gains from the fourth quarter of 1992 through the fourth quarter of 1995.
The biggest contributor to the second-quarter gain is expected to be the energy sector, where profits are expected to climb 24 per cent. The weakest earnings growth -- just 2 per cent -- is expected in health care.
A market 'incorrection?'
This isn't a correction; it's an "incorrection."
We confess we'd never heard the term until we came across it in a recent note from David Kelly, an economic adviser at Putnam Investments.
So we'll let him explain it:
"I think the word correction is a somewhat loaded term. It seems to imply that the market had it wrong in April and now has it right. I actually think the market was more appropriately priced in April than it is today. So I guess I'd rather call it an incorrection."
Why is the market, um, incorrecting? He gives three reasons:
"The Federal Reserve is talking too much about inflation."
"The investing public is listening too much to the Federal Reserve."
"Investors are not paying enough attention to a very positive economic backdrop."
In Mr. Kelly's view, inflation isn't the big threat Fed chairman Ben Bernanke et al. make it out to be. The core inflation rate, excluding volatile food and energy prices, was 2.3 per cent year over year in April, a hair above the average of 2.2 per cent over the past decade. The slowdown in the U.S. housing market will likely keep core inflation from heating up, he says.
One reason the market has turned down as inflation fears have risen is that investors are still skittish after the market collapsed in 2000, he says.
"Stock market investors today are a little like earthquake survivors. Any little tremor makes them run for cover. And that is why they can react so violently to this Fed commentary," he says.
|
