With the mood of North American consumers already sliding from downcast to disconsolate, money managers are watching closely to see whether high energy prices are causing a short bout of brooding or a long-term sulk.
“We know what he thinks but we don't know what he will do,” Clément Gignac, chief economist and strategist at National Bank Financial Inc., says of the consumer. “He's concerned and disturbed.”
Mr. Gignac cautions that hurricane Katrina's battering of the U.S. Gulf Coast on Aug. 29 could have been a tipping point — a sort of reality check on the tapped-out balance sheet of the U.S. householder.
He says he was already defensive before hurricanes Katrina and Rita hit and he feels even more comfortable with that position now. He is moving more heavily into gold.
But Mr. Gignac adds that sentiment indicators often send out false signals because the consumer's pessimistic mood may improve dramatically a month later. He will be watching to see whether people actually pull back spending on houses, SUVs and other automobiles, and gasoline.
Data this week show gas consumption has already slipped and Mr. Gignac is wondering if the dip is the start of a new trend.
The market, he says, is confident that rebuilding efforts will help the U.S. economy, and the consumer will stay the course. “It's possible, but more likely that the reconstruction effort will be offset by consumer deceleration because of the monthly heating bill.”
Mr. Gignac thinks the most likely economic aftermath from the storms is a U-shaped recovery. In other words, the U.S. economy may take longer to rebound than it has after past disasters because the damage to infrastructure from the storms and to consumer purchasing power from high gasoline prices is so great in this case.
Numbers from the Conference Board this week show that U.S. consumer confidence suffered its largest drop in 15 years after hurricane Katrina sent gasoline prices to record highs. The confidence index fell 20 points in September to 86.6, the lowest reading in nearly two years.
Mr. Gignac warns that a slowdown in spending could act as a drag on growth in China and other parts of Asia, which in turn could hurt Canadian resource stocks.
He is sticking to a fairly bearish prediction that the S&P/TSX composite index could slide to a range of 9,500 to 10,000 points by next spring. Yesterday, it closed at 11,018.50.
While he acknowledges that he was premature in adopting a pessimistic tone on the Canadian market earlier this year, he sees more risk of a hard landing now.
The strategist has moved his recommendation on gold to “overweight” and remains “underweight” on energy. He remains “overweight” on consumer discretionary stocks in Canada because he is betting on a tax cut for Canadians in the next federal budget.
Timothy Ghriskey, president of Solaris Asset Management LLC in Greenwich, Conn., believes consumers were already feeling the pinch of high gas prices this summer and spending less. The arrivals of Katrina and Rita only exacerbated that frustration when they sent gas prices soaring.
As Mr. Ghriskey points out, credit card delinquencies are also up. But he believes the hurricane impact on the U.S. economy will diminish quite quickly, noting that crude has already pulled back from its highs.
As the rest of the year unfolds, he expects to see a boost to the U.S. economy from the reconstruction.
He is keeping fairly hefty weightings in technology, where he thinks spending is sustainable and the stocks are good value. He also likes health care and financial services.
Meanwhile, he says, the gloom is very much priced into retail stocks. He sold off most of his holdings in the group last spring. In fact, the sector has been so battered in his opinion that he expects to see a rally at some point.
The portfolio manager has reduced his holdings in oil and gas stocks to about 10 per cent of the portfolio. “We think you have to be in energy, though we've pulled back our exposure recently.”
© The Globe and Mail
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