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With the imminent increase in U.S. interest rates ‘off the table’ in October, there was some minor weakness in the U.S. dollar which also allowed commodity prices to bounce put a bit of a tailwind behind Canadian stocks. Canadian stocks were overdue for a bounce, though, as the S&P/TSX Composite Index, was trading at a price-to-earnings ratio below its long-run average. At the same time, the ‘trade-oriented’ Canadian economy was starting to benefit from a weaker Canadian dollar. There were a couple of encouraging data points for Canada recently, including better-than-expected GDP data for August and September. The World Economic Forum also ranked Canada’s banks as the world’s soundest for the eighth year in a row. But that didn’t stop U.S. short sellers from adding to their bearish positions on Canadian bank stocks, believing that our housing market is on the verge of collapse and about to suffer as ‘U.S. 2007 style’ meltdown.
Finally, to finish the month, the Fed did try to ‘claw back’ a bit of their September ‘reluctance’ to move on interest rates by coming out with a somewhat stronger statement at the October 28th meeting. The Fed put the markets on notice that it wants to move off of its zero rate policy in December, if the economy is strong enough. The Fed, as expected, held off from raising interest rates that day but, in a very clear and unusual message, the Fed’s post-meeting statement specifically mentioned the December meeting. The committee said in determining whether it will raise rates at its “next meeting”, it will assess the progress toward “its objectives of maximum employment and 2 percent inflation”. Maybe there is some backbone in that room after all!
We are still very skeptical about the current rally in stocks and have again reduced positions across the board. Weaker economic growth, missed earnings expectations and muted forward guidance are not the hallmarks of a bull market. While near-zero interest rates will continue to buoy stock valuations, we were once again reducing weightings in cyclical stocks into this strength in late October. The technical condition of the market also looks somewhat ‘tenuous.’ While we are not professional technical analysts or ‘chartists’ you don’t have to have spent too much time looking at stock charts to see that the chart of the S&P500 (shown below) looks like it could have some more shaky days ahead. Not only have both the 50-day (green) and 200-day (red) moving averages started to head down, we have also seen what is referred to as a ‘death cross’ in late August, which is when the 50-day average crosses below the 200-day average. On top of this, the index has not experienced a serious correction since the summer of 2011, much longer than the typical period.
On top of this bad technical picture we add falling earnings growth, a worsening global economic outlook, stock valuations that remain well above long-term averages and a diminishing beneficial impact from low interest rates. For these reasons we remain cautious on the outlook for stocks. Unless the global economic data starts to gain some strength, we would not be aggressive buyers of stocks above the 1600-1800 range for the S&P500 Index.