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By John Heinzl
The Globe And Mail
Report on Business
Wednesday, October 18, 2006
Stocks took a breather yesterday, as concerns about inflation and slowing growth overshadowed a handful of solid earnings reports and some good -- or at least less bad -- news on the U.S. housing front.
Adrian Mastracci, portfolio manager at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "There's a fear factor in the markets . . . given that the U.S. is going to go into some sort of a slowdown. For clients who can't stomach a lot of volatility, they should trim their equity exposure and move some cash into fixed-income holdings."
In a setback for investors hoping for lower interest rates, the latest report on U.S. producer prices showed inflation remains a threat. The Labour Department said core producer prices, which exclude food and energy, jumped a surprising 0.6 per cent in September -- the biggest increase since January, 2005.
The increase, which was fuelled by higher prices for motor vehicles, indicates the U.S. Federal Reserve Board may be in no hurry to cut interest rates, even as the overall producer price index tumbled 1.3 per cent, reflecting a record 22.2-per-cent drop in gasoline prices.
Adding to the economic uncertainty, the Federal Reserve said industrial production skidded 0.6 per cent last month -- the biggest drop in a year -- underlining concerns about slowing growth.
"There's a fear factor in the markets . . . given that the U.S. is going to go into some sort of a slowdown," said Adrian Mastracci, president and portfolio manager at KCM Wealth Management Inc. in Vancouver. For clients who can't stomach a lot of volatility, Mr. Mastracci recommends they trim their equity exposure and move some cash into fixed-income holdings.
Apparently, some investors were doing just that yesterday.
Ending a three-day winning streak, the Dow Jones industrial average slipped 30.58 points to 11,950.02, as investors retreated after three days of gains that sent the blue-chip average to record highs. Other market barometers also fell, with the S&P 500 down five points to 1,364.05 and the Nasdaq composite index off 18.89 points to 2,344.95.
Canadian investors also grappled with a confusing economic picture, as the Bank of Canada cut its forecast for economic growth but said it expects the core inflation rate to creep above its 2-per-cent target in the months ahead before slipping back to 2 per cent by the mid-2007.
"All factors considered . . . the Canadian economy continues to operate just above its production capacity," the bank said in leaving its benchmark interest rate unchanged at 4.25 per cent. For the markets, the message was clear.
"The bank appears to be squashing any notion of a rate ease at this point," said Carolyn Kwan, an economist at Bank of Nova Scotia.
Their hopes for lower interest rates dashed, Canadian investors also took some chips off the table. The S&P/TSX composite index fell 64.91 points to 11,996.63, ending a string of three consecutive advances.
For Canada's energy-intensive market, it didn't help that the price of oil resumed its losing ways. On the New York Mercantile Exchange, crude for November delivery fell $1.01 (U.S.) or 1.7 per cent to close at $58.93 a barrel.
The S&P/TSX capped energy index fell 1.3 per cent for the biggest drop of any sector, with five oil and gas producers -- EnCana, Canadian Natural Resources, Petro-Canada, Nexen and Suncor Energy -- accounting for nearly half of the S&P/TSX's total point loss.
Not that there weren't some flashes of optimism yesterday. Shares of Johnson & Johnson and Merrill Lynch rallied after both companies reported third-quarter results that topped analyst estimates.
And, in a sign the struggling U.S. housing market may be nearing a bottom, sentiment among home builders actually improved in October -- although not by much.
The National Association of Home Builders/Wells Fargo index of builder confidence inched up to 31 from 30 in September, reversing a string of eight consecutive declines.
NAHB's chief economist David Seiders cited a recent dip in mortgage rates, lower energy prices and improving consumer sentiment for the stabilization in builder confidence. But let's not get too excited: A reading of 31 still indicates most builders view the market as poor.
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