TORONTO - Investors' optimistic mood seems to be fading, and could darken further this week as second-quarter earnings begin to trickle out and Canada releases its unemployment numbers for June.
The Toronto Stock Exchange lost about one per cent last week as investors began to rethink earlier optimism in light of negative economic data.
Andrew Pyle, an investment adviser with ScotiaMcLeod in Peterborough, Ont., described the markets' reaction as a "reality check."
"I think investors are beginning to rethink the imminent recovery theory that was pervasive in the markets all through the second quarter," Pyle said/
"One of the reasons why stocks were able to mount a 30 to 40 per cent rebound from the March lows was because of this view that not only were we going to get recovery this year, but we were going to get recovery fairly soon."
However, employers in the United States cut a larger-than-expected 467,000 jobs in June, driving the U.S. unemployment rate up to a 26-year high of 9.5 per cent.
Canada's own unemployment numbers are to be released Friday. Economists expect another 30,000 job losses will be logged for June when Statistics Canada releases the latest data. The country has lost 363,000 jobs since last October.
Although talk of so-called "green shoots" was instrumental in pushing the market back up from its rock-bottom point in March, Pyle said high expectations can be dangerous, especially when they're unrealistic.
With U.S. companies beginning to issue their second-quarter results this week and Canadian companies not far behind, Pyle cautioned that investors may be disappointed, which could put downward pressure on markets.
Alcoa, traditionally the first Dow industrials component to release earnings, is set to report on Wednesday.
"It's not so much what the absolute numbers are but where they are relative to expectations," Pyle said.
"Given all this 'green shoot' talk in the second quarter, given that we had the lift in equity markets, that expectations for the quarter probably drifted higher, people probably became a little bit more optimistic and that may have inflated earnings expectations going into this season."
Pyle predicted that markets will backslide in July, retracing "some and hopefully not all" of the gains they experienced in the spring.
CIBC economist Meny Grauman suggested the theme of the second half of 2009 will likely be "inching towards recovery."
"The last six months were exciting for all the wrong reasons as the global economy came close to falling into a depression and the American banking system teetered on the edge of systemic failure," Grauman wrote in a commentary.
"Those worst-case scenarios did not come to pass, giving a big boost to equities and fuelling talk of a robust economic recovery. Unfortunately, the next six months are likely to be unexciting for all the wrong reasons as the economic recovery moves much slower, and less decisively, than many people expect."
But it's not all bad news, Pyle said.
The sense that the stock market rally is over, at least for now, has boosted the bond market, and lower oil prices could actually help the economic recovery as energy prices stay low for consumers and businesses alike.
"You might be disappointed about what's happening this quarter in the economy, but having interest rates calm down and having oil prices calm down at least allows you to stay positive in terms of the end of the year," Pyle said.
