Market rally stalled, not sidelined: Economist

(March 12, 2004) Stocks have stumbled badly this week and could fall even further, says economist Sherry Cooper, predicting a correction of about 10%. But Cooper believes this is not the end of the bull market.

“While economic activity has slowed worldwide from the breakneck third-quarter pace of last year, lower interest rates and still-strong fiscal stimulus in the U.S. will assure an economic revival,” Cooper said in a commentary posted today on the BMO Nesbitt Burns Web site.

The TSX and the S&P 500 are both down 4% so far this week in the wake of some disappointing economic news and the terrorist bombings in Spain.

In addition, China’s economic boom appears to have peaked, at least temporarily, Cooper notes. “Industrial production growth in China slowed in the first two months of this year. The Chinese government has curbed investment in the steel, cement and aluminum industries.”

Those factors have combined to create a deceleration in corporate earnings, Cooper says, noting that Canadian stocks had suffered their biggest decline in almost a year by mid-week, led by tech shares and resource producers such as Alcan and Inco on concern that worldwide economic growth may not boost demand for materials sufficiently to justify the past year’s stock gains.

Tech companies were also hard hit, as investors began second-guessing the recent rally in the sector. “Valuations remain excessive and the appetite for risk is clearly waning,” says Cooper, predicting that tech stocks could fall even more than 10% in the short term.

Still, there’s plenty of economic stimulus on the horizon, says Cooper, pointing to mortgage refinancings, home equity cash-outs and tax refunds.

Rising commodity prices will also be a boon to the Canadian economy, she adds, and the stabilization of the Canadian dollar will give exporters “breathing room to make the adjustments necessary to compete in this stronger-loonie world.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com