TORONTO - Stock markets could find it difficult to find traction this week on a further indication the U.S. economy has stalled and more concerns rooted in the global credit crisis.
Indexes in Toronto and New York lost ground last week after data on Friday showed a net loss of 63,000 jobs in the United States last month, against the modest expectations of a 30,000 gain.
"I think it's going to cause a lot more people to jump into the recession camp,'' said Patricia Croft, chief economist at Phillips, Hager and North.
"The reality we have the largest decline in jobs in almost five years and coupled with the ongoing malaise in the housing market, it's going to cement a lot more people's views that the U.S. is in recession.''
Croft said the debate its turning to how long and how deep the recession might be.
That debate has market opinion split into those who believe such a recession would be relatively short and shallow with emerging world economies, particularly those in China and India, picking much of the slack even as demand from the U.S. stalls, and those who don't.
"I would like to believe that, but I just think the risks are skewed to the downside because we are now in the midst of a classic credit crunch/crisis, this has gone way beyond subprime, this has direct ties to the real economy and it's global as well is the other aspect of it,'' said Croft.
Integral to that scenario is a U.S. Federal Reserve ready to continue to aggressively slash interest rates, taking us back to recovery mode by the fourth quarter.
Investors are expecting the Fed to continue aggressively cutting rates and are hoping for a cut as large as one percentage point later this month.
But Croft believes the credit crisis won't be solved just through lower interest rates and more government intervention could be needed.
"Maybe we have to see something . . . where we have some type of facility where the government can step in and act as managing the crisis,'' Croft said.
The Toronto stock market has outperformed U.S. markets this year with the S&P/TSX composite down about four per cent for the year, compared to a drop of 10 per cent for the Dow industrials, 16 per cent for the Nasdaq and 12 per cent for the S&P 500.
This has been due in large part to rising commodity stocks as investors hope that other countries can take up the slack from a U.S. recession, something Croft has found startling.
"What's happening I think is that we're seeing a bit of a momentum play here where investors are bailing out of stocks. Who wants to be in stocks or bonds when the yield just keeps diminishing? So it's a switch into commodities which is driving a lot of the momentum of the price,'' Croft said.
In the meantime, one thing seems certain --lots of volatility while damage from writedowns connected to U.S. mortgages and the American economic downturn runs its course. And Croft said that calls for plenty of caution.
"In our asset allocation strategies, and our balanced funds, we're still sitting on quite a bit of cash . . .(we're) underweight total equities and just kind of seeing how this thing plays out,'' she said.
"I think at some point we will switch from fear, which is focused on bank balance sheets and writedowns, and switch back over to greed.''
