Economy in flux, says economist; Canada to release unemployment numbers this Friday

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THE CANADIAN PRESS

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TORONTO - It was a gut-wrenching week for investors as the Toronto stock market wiped out $150 billion of value and bounced around like a pinball, and it's likely there'll be more of the same ahead as the global economy deteriorates and drags commodity prices down with it.

"The situation is still very fluid, very much in flux," said Patricia Croft, chief economist of investment firm Phillips, Hager and North.

"I think markets are rallying from a deeply over-sold position, but nonetheless the reality is the economic backdrop continues to deteriorate."

All eyes will be on Alcoa as the Dow component kicks off the third-quarter earnings season with its report tomorrow. The average analyst estimate is for earnings of 53 cents per share.

Canadian unemployment numbers will be released Friday and Croft said they likely won't be pretty.

"I suspect we'll see a softening of Canada's labour market," she said. "This is truly a global credit crisis, and now it's being overlaid by growing concerns about a slowdown in the global economy."

Croft added that she expects markets to react to the passage of the bailout bill with some "sober second thought" this week.

"This is a very complex process that's going to have to be undertaken to determine the price of those distressed assets. It's not going to happen overnight," she said.

"There could be this sober second thought: 'What does this really mean, how does it work, and how long is it going to take?"

Stock markets closed in the red Friday after a bailout plan for U.S. banks passed Congress, ending a dismal week that saw two separate 800-plus point declines on the Toronto Stock Exchange.

The Toronto market ended down 1,322.64 points or 11 per cent last week -- an equity loss of $150 billion -- after tumbling oil prices and revised earnings estimates for fertilizer makers sent commodity stocks plunging.

A seemingly endless parade of bleak U.S. economic data also served to push New York markets lower. The Dow Jones lost 817.75 points over the week, while the Nasdaq declined 235.95 points.

Gareth Watson, Canadian equity adviser at ScotiaMcLeod, said investors have had their trust shaken and markets won't turn around until that trust is restored.

"Just ask yourself, would you go and buy something from someone you don't trust? And if the answer is no, it applies to the stock market as well," Watson said.

But Croft said investors shouldn't despair just yet.

"I think a very important point to remember is that stocks will bottom long before the credit crisis is over and long before the economy troughs. That's the good news," she said.

"There are incredible opportunities amidst the doom and gloom, but I think the worst thing people can do right now is redeem and get out of the markets, because history has shown very, very consistently that significant downdrafts are followed by sharp bounce backs, and if you're out of the market you're going to miss that opportunity."