Highlights

    • Over the last month momentum has slowed in the stock indexes of both developed and emerging markets. This development has coincided with increased talk of exits from loose monetary policy stances in emerging Asia and with tough talk about the banking industry from U.S. and European policymakers.
    • The U.S. S&P 500 index has corrected 5.1% since its peak of January 19, prompting concern about the sustainability of the bull market and the economic recovery. So far, this correction is within the normal range of pullbacks occurring in the run-up that began last March. We do not expect an above-normal retracement of the S&P 500 given its current very reasonable valuation (forward P/E about 14).
    •  The recent decline in equities has been amplified by the Obama administration's proposal to limit the business of commercial banks and by the news that some senators were turning against the reappointment of Fed chairman Ben Bernanke. The introduction of an overly stringent regulatory framework is one of the main risks to our recovery scenario. For now, we see this risk remaining in check.
    • It is important to keep in mind the current state of the economy and the strength of the tailwinds supporting growth in 2010. Leading indicators remain consistent with our view that the global economy will expand about 4% this year. With growth at that rate, earnings are sure to improve in both scope and quality.
    • We reiterate our recommendation to overweight equities and underweight fixed income assets. Our year end targets for equity markets are unchanged at 12,700 for the S&P/TSX and 1280 for the S&P 500.
    • Our sector rotation remains positioned for above-trend global GDP growth. At this point in the business cycle we are comfortable with our call to favour growth stocks and cyclical sectors. Valuations for base metal stocks are still based on a fairly conservative commodity price deck for 2010.

    Momentum slows

    Momentum has slowed over the last month in the stock indexes of both developed and emerging markets. This development has coincided with increased talk of exits
    from loose monetary policy stances in emerging Asia and with tough talk about the banking industry from U.S. and European policymakers. Notwithstanding the increased volatility, equities remain on an uptrend. We expect further advances when the turbulence abates.