September is usually a pretty volatile month with the summer vacation crowd coming back to their desks and investors re-assessing their views for the balance of the year.  This year was no exception as the markets had experienced an unprecedented period of low volatility over the summer as the market basically had no days with moves of over 1% in either direction during July-August.  That ended quickly in September as stocks sold off after some comments from various Federal Reserve Governors that it was time to start raising interest rates.  However, at the Sept 21st critical meeting of the U.S. Federal Reserve, the ‘uber-dovish’ Janet Yellen once again avoided making the tough call to raise rates, and markets rallied.  Then came the ‘face-to-face’ clash of U.S. presidential hopefuls as Hillary Clinton and Donald Trump had their first debate of the campaign.   Investors seemed to breathe a sigh of relief as Ms. Clinton came out as the deemed winner, which helped solidify the stock market consensus that she will become the next president.  A proposed agreement among key OPEC oil producers to limit production then gave a boost to energy stocks and lifted the entire market, but that was reversed when the credit and balance sheet problems at Deutsche Bank became public and investors started to worry that we were facing another ‘Lehman moment’ like the one that started the financial crisis in 2008.   The combination of all these events took the ‘summer lull’ out of stocks despite the fact that the net change for the month ended up being relatively minor.  Volatility is clearly back though!

Looking at the performance of major stock markets during 2016 in the table below, the most noticeable fact is in the two columns on the far right.   The strongest gains so far this year are opposite to the ones that dominated in 2015.  While most European and Asian stock markets did well in 2015, the U.S., Canada and Britain were all in negative territory.   Those have reversed in 2016 as the fall in the U.S. dollar has revived some strength in the commodity sector while the Brexit vote and it’s negative impact on the British Pound has made investors more positive on the outlook for that economy.Relative market performance, September 2016

Looking at the year-to-date returns for various markets, it has clearly been a year where the underperformers of the past few years have staged sharp recoveries.   While the downtrodden energy sector has lead the gains in the U.S. market, the gold sector has fueled the rise in Canadian stocks to the lead among the G7 stock markets.   But it was outside of North America that the real action has occurred.  Defying what seems to be simple logic, why is it that the most messed-up economies can sometimes generate the biggest stock market gains?  Brazil’s year long political crises hit its crescendo in late August after politicians voted to remove its president, Dilma Rousseff, from office.  Yet year-to-date the Brazil stock market has climbed 66%, a major reversal from the 41% decline it experienced in 2015.  Russia shares something in common with Brazil — they’ve both been hard-hit by the oil crash.  Russia has also been busy invading neighbors as its petro-led GDP shrank by a whopping 40% year-over-year. But there’s been no hangover in Russian stocks, which have seen massive gains.  The Russian ETF (RSX) has gained over 30% so far this year.  The fundamentals of neither of those economies have improved, so most of the gains have to be attributed to a bounce from oversold conditions and exceptionally low valuations.  To sustain these gains we would need to see some real economic recovery, and that doesn’t seem likely given the slowdowns in growth in their major customers, the U.S., Europe and China.

In terms of global risks, we continue to see a slowdown in Chinese growth and a re-adjustment of their banking system to account for bad loans as the greatest to global growth and financial markets.  Although government debt levels have sky-rocketed in almost every major country,  if you want to look at a part of the world that has accumulated debt at the most aggressive rate, look at China. They’ve seen credit fueled growth following the financial crisis in 2008.  China, the biggest economic story of the last 30 years, has soured in the eyes of many analysts, with a stock market crash that began in the country last summer high-lighting the difficulties facing Chinese lawmakers.  George Soros, Jim Chanos and other major hedge fund managers have warned several times on the country, stating that China’s debt-fueled growth bears an ‘eerie resemblance’ to the conditions leading up to the 2008 financial crash.  After years of triple-digit growth, the economy is slowing and the IMF expects China’s GDP (gross domestic product) to grow by 6.6% this year, suggesting country’s economy was having a pretty hard landing already.

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