ALLAN ROBINSON
October 16, 2008
The soft spots in the U.S. manufacturing sector - housing, autos and planes - are clear and now strategists think those woes will be compounded by a global slowdown.
Industrial production data in the United States, which are scheduled for release today, are forecast to have declined by 0.8 per cent in September, compared with a 1.1-per-cent drop in August, according to a survey of economists by Bloomberg.
"The body blows to the U.S. economy are coming fast and furious, suggesting a deeper recession is all but inevitable," said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.
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The ripple effects of a U.S. recession along with the global slowdown will almost certainly have Canadian investors dealing with the fallout.
"Financials have led the S&P/TSX through every recession and appear to be doing so again," George Vasic, a strategist with UBS Securities Canada Inc., said in a report to clients. "We look for this to continue as Canadian banks are well capitalized, are not at the epicentre of the crisis, and should quickly benefit when policy initiatives take hold, while cyclical [companies] trail."
UBS Securities Canada looks for oil prices and other commodities to lag given the economic slump. They also expect a disinterest in gold mining stocks once the crisis passes and deflation worries rise.
Commodity prices are already pricing in a dire global recession, said Meny Grauman and Avery Shenfeld, economists with CIBC World Markets Inc. "The magnitude of the decline in aggregate commodity prices [as measured by the Commodity Research Bureau index] that we have already experienced is more than three times the average decline over the past five global slowdowns [since 1973]."
Clearly, investors are betting on a severe recession extending well into 2009. But there is reason for some optimism. "Looking ahead, it is important to remember that equities always bounce back before the economy does and that their rebounds are steep," said Clément Gignac and Pierre Lapointe, market strategists with National Bank Financial Inc. "In the past recessions, the S&P 500 recouped an average 30.2 per cent within six months of the market trough." Even with an extended period of subpar economic recovery, equities will rebound many months before profits do, they said.
