What is Killing Canada’s Benchmark?

Monday, January 15th, 2007
By Inya Ivkovic, MA for Profit Confidential

As it turned out, the overall economy’s a party-pooper! Why? Well, in the topsy-turvy world of stock markets, “good” is the new “bad.” Meaning, recently, every time the economy shows it has a pulse, stocks get a black eye.

For example, last week, out of five trading sessions on the Toronto Stock Exchange, four were on the sliding slope, dropping 85 points on Friday. U.S. indices fared the same, except the NASDAQ, which should thank Apple profusely for the moderate boost.

So, what’s going on with stocks in Canada? Well, for starters, commodity prices have hit a soft patch, which hasn’t been good for Canada’s benchmark index. To illustrate, just on Friday, oil prices dropped 3.9% before bouncing back. For the past 52-weeks, crude is down about 15%.

But, commodities are not the only thing behind the lackluster start to the New Year. Apparently, North American economies are like the bad guys from even worse western movies. No matter how many bullets you lodge in them, they just keep on writhing in agony, clinging to their miserable lives and taking forever to die.

I don’t know what it was that kept the bad guys from old westerns alive, but both the U.S. and Canadian economies seem to have benefited more from a few good pieces of news than they have been hurt by a whole slew of bad news.

The good news that fortified the two economies’ resilience included the employment numbers two weeks ago. Last week, the Bank of Canada’s bubbly quarterly business outlook gave a boost. As a result, the chance of interest cuts has decreased exponentially. For all we know, interest rates might even go up!

So, what is everyone thinking? Remember a while back when economists on both sides of the border drew a very long and nasty line, with one side hoping for the “soft landing” and another forecasting a “head-on crash”? Well, as of late, the potential for the first scenario happening seems to be increasing, while the risk for the other seems to be decreasing.

In addition, not only are economists becoming more optimistic, but consumers are also pumping up the economy by maintaining their healthy (though economically unjustified) spending habits. Not even dire predictions of a housing market crash stopped consumers from loving the mall just a tad too much.

As favorable economic data keep on flushing the newswires, the risk of an unfavorable interest rate environment continues to grow. This helps create riskier price-to-earnings multiples in the stock markets, dragging most of the major North American indices downward. To make matters worse, the economy growing, although barely, is hardly enough to undo the negative trend in commodity prices. And that is what’s killing Canada’s benchmark of late.

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Tags: interest rates, stock market