Economy 2001: Bad start, what’s ahead?

The year is more than half over. Hard to believe, but a natural time to pause and reflect on where we’ve been and where we might be going.

In doing so, I’m reminded of a visit I paid a few years ago to Les Baux-de-Provence in the south of France. It’s a village perched on a small plateau beneath a hilltop summit. At the top are the ruins of a medieval fortress that once dominated the region. The view from the summit is surreal. On one side, you look across lush cultivated fields and picturesque vineyards to the shores of the Mediterranean Sea. Turn around and you’re confronting a vista of craggy rocky outcrops devoid of vegetation. Locals call it Val d’Enfer (Hell Valley).

Legend has it that Dante once visited here and that the sharply contrasting views inspired him to write The Inferno. Whether that is true or not, the metaphor is apt for our mid-year review of the markets.

Market view
Looking back over the first six months is like looking at Val d’Enfer. It is a bleak, unforgiving landscape. Virtually every major world index is down. Starting here at home, the TSE 300 lost 13.4 per cent in the first half of the year, while the S&P/E 60 slipped 15.9 per cent.

Both did worse than the U.S. indexes, even Nasdaq which was off 12.5 per cent. The S&P 500 was down 7.3 per cent while the Dow lost 2.6 per cent.

The only U.S. index of significance that gained ground was the small cap Russell 2000, which was ahead 5.7 per cent. That helps explain why some U.S. small cap funds such as Fidelity Small Cap America have been shooting out the lights recently.

Overseas markets
Overseas, the story isn’t any better. Hong Kong is down 13.6 per cent on the year. Tokyo has lost 6.2 per cent.

London has given back 9.3 per cent. Frankfurt is off 6.2 per cent. Paris has lost 11.6 per cent.

About the only markets that have shown any strength are those in Mexico City, Sydney, and Dublin and not many Canadians have money there.

Old economy
Still, it wasn’t a total disaster. Most of the damage was concentrated in the technology sector. The S&P/TSE 60 Capped Index, which was less influenced by the Nortel debacle, has lost only 7.2 per cent year to date. That’s less than half the setback suffered by the uncapped version.

Also, some stocks performed very well in the face of this market malaise. We saw good gains with CN Rail, CP, Alcan, Gulf Canada, Sun Life, Manulife, and others. But most of the gains were from Old Economy issues. The New Economy is still flat on its back.

Looking ahead
But now let’s turn and look in the other direction, to the rest of the year. Do we go from Hell to Paradise? Probably not. But we have good reason to look for an economic and financial landscape that is less tortured than the one we have just traversed.

The U.S. Federal Reserve Board sent a signal last week that the picture may be brightening when they decided to ease interest rates by only a quarter of a point. The move disappointed the markets. But optimists read it as a sign that Alan Greenspan’s massive data bank is starting to send out some encouraging signals.

We also saw some good news on the consumer front from the States, on two counts:

    1. A revision of first quarter numbers shows that consumer spending in the early part of the year was stronger than expected. To confirm that, two separate surveys showed a slight rise in the consumer confidence level in June.

    2. The tax cut implemented by the Bush administration should further feed this trend in the second half.

Inflation, lay-offs
The recent decline in the price of oil and natural gas has taken some of the inflation concern out of the market and that is also positive.

On the negative side, corporate profits continue to be weak and we’re still getting profit warnings. Massive lay-offs in the technology industry are still being announced as these companies try to cut costs.

U-shaped recovery
However, on balance, the picture appears to be brightening. It appears that we’ve passed the nadir and have begun the long climb back. It won’t come quickly. Most economists are predicting a U-shaped recovery pattern rather than a V-shaped one.

And there will be setbacks along the way. But I’d much rather be where we are today than where we were when the bowl games were being played on New Year’s Day.

Adapted from the Internet Wealth Builder of July 3, 2001. For membership information: