The stock market will continue to shrug off bad economic news, such as Friday’s drop in employment in Canada and the United States, because it has already priced in something much worse, Jeff Rubin, the chief economist and strategist at CIBC World Markets says.
“The bad news is that we are in a recession, and a fairly deep one at that. The good news is that the stock market has already discounted a depression,” he says in his latest Canadian Portfolio Strategy Outlook Report.
As a result, he expects the “slightest pulses in second-half growth” in 2009 to drive the TSX up to 11,000 by the end of the year. The recovery would likely be helped by government fiscal stimulus packages.
“Stocks can only cheer as businesses and households will be force-fed stimulus money from governments that will no longer care about deficits,” says Mr. Rubin. He said deep interest rate cuts and fiscal stimulus efforts around the globe would likely cause global growth to return by the second half of 2009.
Oil prices will also rebound along with the economic recovery. “If $40-$50 per barrel is the price of oil in a deep global recession, it shouldn’t be too hard to figure out why our portfolio is four points overweight energy stocks,” he says.
But with conditions to remain soft in the short-term, Mr. Rubin is keeping his equities portfolio at market weight for now. He recommends underweight positions in sectors most exposed to downside economic risks, especially in companies linked to consumer discretionary spending and autos. He recommends overweight positions in some of the traditional safe havens, such as utilities and consumer staples.