bmo global equity weekly 11-18-2011

8/3/2019 BMO Global Equity Weekly 11-18-2011

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ECONOMICR E S EAR CH

Robert Kavcic, Economist November 18, 20

1-800-613-0205 • www.bmonesbittburns.com/economics

Mixed EmotionsEquity markets were under pressure this week, as ongoing turmoil in Europe outweighed further signsthat the U.S. economy maintained its momentum into the fourth quarter. The S&P 500 fell 3.8%, with all

sectors in the red, including steep 5%-plus declines in materials, energy and financials. Meantime, theTSX slumped 3.1%, also amid broad-based weakness, including a deep 6.7% dive in the gold sector.

While equity markets have firmed up since late summer, the overriding concern about a messy outcomein Europe continues to act as a ceiling on sentiment and equity prices. One can argue that, if not for theuncertainty in Europe, stocks would be flaring higher in typical late-year fashion right now, thanks to alow base of sentiment, still-strong earnings results and firming U.S. economic momentum. Equity marketsentiment was extremely depressed by late summer, with most measures registering bearish tones not

seen since the Great Recession,and the mood remains quitedownbeat today. Additionally,valuations are ringing in favour of equities, with the S&P 500 forwardearnings yield topping 8%, ormore than 6 ppts above 10-yearTreasuries. But, a favourablesentiment and valuation backdropis, by itself, not a sufficientcondition to spur stock priceshigher. Rather, that combination plus improving fundamentals arewhat the bulls need.

Setting Europe aside for a minute,some fundamentals have indeed

improved, namely the all-important U.S. economy. U.S. economic data continued to top expectations this week, including better-than-expected reports on consumer spending, industrial production and housing. Interestingly, the much-maligned housing market continues to show signs that it is at least finding some stability, if not a ray of upward momentum. The combined mortgage delinquency and foreclosure rate fell to the lowest levelsince late 2008 in Q3, homebuilder confidence has firmed, and mortgage lending standards have at leaststabilized after about 4 years of tightening. There’s no question that the level of U.S. housing activity isstill extremely depressed, but stability is good news at the margin. All told, after a very sluggish first half for the U.S. economy, immediate recession fears have subsided, and decent 3% GDP growth appears likelyin Q4.

Ordinarily, this would be just the fundamental improvement that the bulls need to unwind bearishsentiment and favourable valuations, pushing stock prices firmly higher. But the European trump card isstill in the deck, and equity investors are rightfully hesitant given some potentially ugly consequencesfrom the sovereign debt crisis. Not to be overlooked, Europe makes up about 30% of S&P 500 revenues,and recession in that region has the potential to eat into otherwise still-solid earnings results. In short,stocks probably want to burst higher, but Europe won’t let them.

Market Performance as of November 18, 2011

Current Performance (percent)

Price 1 Week 1 Month 3 Months 1 Year YTD 2010

IKKEI 225 8,375 -1.6 -4.2 -6.4 -16.4 -18.1 -3.0

ow Jones 11,796 -2.9 1.9 7.3 5.5 1.9 11.0

S&P/TSX 11,892 -3.1 -1.3 -2.4 -7.6 -11.5 14.4

China CSI 300 2,606 -3.3 0.6 -8.0 -17.2 -16.7 -12.5

TSE 100 5,363 -3.3 -0.9 5.3 -7.0 -9.1 9.0

S&P 500 1,216 -3.8 -0.8 6.6 1.6 -3.3 12.8

ASDAQ 2,573 -4.0 -3.2 8.1 2.3 -3.0 16.9

AX 5,800 -4.2 -1.3 3.5 -15.1 -16.1 16.1

CAC 40 2,997 -4.8 -4.6 -2.6 -22.5 -21.2 -3.3

ource: Bloomberg




• November 18, 2011

TSX Sector Performance (Relative to the index, dashed line = 200-day m.a.)

Consumer Discretionary

0.7

0.8

0.8

0.9

0.9

Nov Jan Mar May Jul Sep

Consumer Staples

1.1

1.2

1.3

1.4

1.5


Energy

2.0

2.1

2.2

2.3

2.4

2.5

2.6


Materials

2.5

2.7

2.9

3.1

3.3

3.5


Industrials

0.9

1.0

1.1

1.2


Technology

0.1

0.1

0.2

0.2

0.3


Health Care

0.2

0.3

0.4

0.5

0.6

0.7


Telecom

0.5

0.6

0.7

0.8

0.9


Financials

1.1

1.2

1.3

1.4


Utilities

1.2

1.3

1.4

1.5

1.6

1.7





• November 18, 2011

North American Sector Performances as of November 18, 2011

S&P 500 Sectors 1 Week 1 Month 3 Months 1 Year YTD 2010

Cons Staples -1.2 0.6 4.3 7.6 5.3 10.7

Utilities -2.2 1.0 6.3 10.8 9.7 0.9Telecom Services -2.9 -1.6 1.5 0.5 -4.9 12.3Industrials -3.0 1.6 10.7 0.7 -6.3 23.9Banks -3.4 -1.5 9.1 -9.4 -19.6 18.7Health Care -3.6 0.6 5.7 6.0 4.0 0.7Information Technology -3.7 -2.7 10.8 4.6 0.7 9.1Cons Discretionary -4.0 -2.1 9.7 5.3 1.1 25.7

Energy -5.4 0.3 6.1 7.8 -0.1 17.9Materials -5.6 -0.2 2.5 -4.0 -12.9 19.9Financials -5.6 -2.6 1.0 -16.0 -21.8 10.8

S&P 600 Small Cap -3.0 2.5 10.5 4.4 -3.8 25.0

S&P 400 Mid Cap -3.5 1.0 7.3 1.6 -5.1 24.9

S&P 100 Large Cap -3.5 -1.2 5.9 1.6 -3.2 10.1S&P 500 -3.8 -0.8 6.6 1.6 -3.3 12.8

TSX SectorsHealth Care 1.4 12.7 12.5 52.0 39.8 50.3Energy -1.7 0.3 1.5 -6.5 -13.1 10.0Cons Discretionary -1.8 -1.0 1.1 -14.4 -17.2 21.8Cons Staples -1.8 -0.7 5.1 4.9 2.5 8.3Industrials -1.8 4.9 6.4 2.1 -0.2 14.4Information Technology -1.8 -8.7 -11.6 -46.2 -46.5 -11.6

Telecom Services -1.9 -1.6 1.4 9.6 10.7 16.2Banks -2.3 -4.7 -6.1 -9.0 -9.2 6.4Utilities -2.3 -3.9 1.0 3.1 -1.4 12.6Financials -2.6 -4.2 -5.5 -9.5 -10.9 6.3Gold -6.7 0.6 -4.0 -4.2 -7.4 26.2Materials -6.8 -1.1 -7.3 -10.2 -16.0 35.8

REITs 0.6 3.2 5.3 9.6 10.8 15.1Income Trusts -0.2 3.3 6.5 15.5 12.4 17.5

S&P/TSX Mid Cap -3.1 -0.2 -1.5 -5.8 -10.4 26.5S&P/TSX 60 Large Cap -3.2 -1.7 -2.7 -8.3 -12.0 10.9S&P/TSX Small Cap -4.3 0.9 -5.3 -10.2 -17.4 31.3

TSX -3.1 -1.3 -2.4 -7.6 -11.5 14.4

Source: Bloomberg

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bmo global equity weekly 11-18-2011

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