RICHARD DREW
Market sentiment this week will be influenced by how the U.S. Federal Reserve reacts to the mounting evidence that the economy is struggling again.
Speculation has increased that the central bank will take new steps to help the troubled economy, most recently after last Friday's employment numbers showed that the U.S. lost 131,000 jobs in July, which was more than anticipated and included less growth than expected from private companies.
On Tuesday afternoon, the policy-setting arm of the Fed, the Federal Open Market Committee, is scheduled to make its twice-quarterly announcement on overnight lending rates and the state of the economy. Rates certainly won't move off their historical low, but there's talk that the Fed might begin another round of asset purchases, either Treasuries or mortgages.
The policy, called quantitative easing, is controversial because it amounts to the government printing money, and the Fed already engaged in the practice for more than a year, before ending such measures in March. But Fed spending can help spur the economy by lowering the cost of credit even further. That's because more demand for mortgage securities and Treasuries helps nudge rates lower.
"Up front, we don't believe the Fed will ease further, though it probably should," Sal Guatieri, senior economist with BMO Nesbitt Burns Inc., noted Friday. "The Fed still has a few arrows left in its policy quiver, and will not hesitate to use them if the recovery stalls. If more stimulus is implemented, look for bond, gold and commodity prices to rally, and the dollar to weaken, as was the case following the initial round of quantitative easing. However, equities may not rally much this time, given concerns that most of the stimulus arrows are merely bouncing off the de-leveraging dragon."
Money managers aren't expecting a quick jump in the markets either, even if the Fed does take action. But some say that they continue to see good buying opportunities today.
Paul Vaillancourt, chief investment officer for Canadian Wealth Management, a Calgary-based boutique investment firm owned by Société Générale SA, has been putting clients' cash back into the market this summer. He says he has found buying opportunities in shares of Canadian banks, Research In Motion Ltd. and Agrium Inc. He's also taken advantage of the strong Canadian dollar to increase exposure to European and emerging markets.
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He concedes that there is certainly a chance of a double-dip ahead. People have been rattled by stubbornly high unemployment and consumer confidence has also taken a hit. As consumers alter their lifestyles in response and increase their savings rate, they may create a self-fulfilling prophecy. But, over all, signs still suggest the economy is stabilizing, he says, pointing out that about 80 per cent of companies reporting second-quarter results have beaten expectations.
"Markets are mixed as investors remain hypersensitive to macro developments despite pretty positive fundamentals," he says.
Vincent Delisle, strategist at Scotia Capital Inc., says stocks are a slightly better option than bonds right now, given that the yield on Treasuries is less than 3 per cent and the S&P 500 is trading in the low 1,100s. His game plan focuses on playing different sectors, reducing exposure to discretionary retail and financials and adding weight in staples and telecom.
But he warns in his August portfolio update that: "Unless the U.S. economy starts adding jobs (private payrolls) at a more dynamic pace, sustaining gains up towards the 1,200 level for the S&P 500 will become challenging. Moreover, the earnings recovery will lose momentum in 2011."