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Summary
- Stocks in Canada rose sharply in October, generating the first positive month since February. The S&P/TSX composite index gained 5.61% last month. Foreign markets were even stronger with the S&P500 up 10.8%, Germany up 11.6% and Emerging Markets gaining 14.7%.
- The Canadian bond market fell in October as bond yields increased on stronger economic data. Longer term bonds dropped the most, falling 1.04% while the overall bond market in Canada had a -0.43% return last month.
- Commodity prices recovered along with the stock market in October as fears about a global recession abated due to stronger economic data, good corporate earnings and European debt deal. Crude oil (+17.7%) and copper (+15.2%) lead the advance as they are the most economically sensitive commodities.
- The Economic data was stronger than expected globally in October and started to put to rest some of the ‘double dip recession’ fears. U.S. and Chinese data in particular showed some strength versus expectations.
- In terms of stock sectors, the economically sensitive or ‘risk on’ groups lead the advance. Energy (+13.2%) and Industrials (+12.1%) lead the gains in Canada while Golds (+1.2%) and Financials (+1.8%) held back the overall market in Canada as those two sectors account for over 40% of the index.
- Our Stock Market Outlook remains extremely positive. Stocks are still reflecting a recession that has yet to occur and may not actually come about. Fears about slowdowns due to the Euro-zone financial crisis and additional worries about growth in China and the U.S. has created the lowest stock valuations in decades at a time when interest rates are at all-time lows (which historically supports higher stock valuations). Earnings growth remains positive, companies are flush with cash and the economic data has yet to show the slowdown feared by investors. Sentiment on stocks remains as bearish as it has been since the last market lows in early 2009. Such periods have always resulted in strong future stock prices and we continue to view current stock levels as a ‘generational buying opportunity.’ If the market continues to advance we could see some ‘panic buying’ into year-end as most pension funds and individuals remain substantially under-weighted in stocks while many hedge funds continue to hold significant short positions in the market which would need to be covered by additional purchases.
Financial Markets: Monthly Review and Outlook
Stocks charged forward in October following seven straight months of losses. The Canadian stock market (as measured by S&P/TSX index) gained 5.6% while the S&P500 index in the U.S. was up a whopping 10.9%, its best single month gain since 2009. The leadership in the market also switched back last month to what worked in 2009-2010, which was the cyclical and resource stock trade. In Canada, Energy and Basic Materials lead the October recovery and you can add the Industrials and Technology sectors to that same list in the U.S. Stocks were clearly oversold as worries about sovereign debt in Europe, a slowdown in China and the risk of a recession in the U.S. all combined to drive markets more than 20% below their highs set in April this year. The ‘trigger’ for the reversal in October appears to have been the plethora of economic data, both in the U.S. and globally, that were stronger than expected and threw some cold water on the idea we were heading straight into another recession less than two years after coming out of the prior one.
Within the stock market there are certainly plenty of signs that investors are warming again to risk. The 50 biggest stocks within the S&P500 gained just 15.9% recently, but the 50 smallest jumped 29.1%. The 50 biggest dividend payers gained just 14%, but those paying little or no dividend jumped 22.2%. After months spent fretting about Europe and China, the 50 stocks with the most foreign revenue jumped 25.1%, while domestic earners gained just 17.9%. Safe-haven stocks that held up the best during the third-quarter collapse gained just 6.9%, while the summer’s worst performers rebounded 35.3%. Clearly the ‘risk-on’ trade returned in October based on these statistics.
The recent string of better economic data is outlined in the chart below; what can be seen clearly is that the economic data has been coming in better than expected since July in the U.S. and since September globally. The recent improvement in Chinese economic data has been a key positive in the global data.
Among the stronger number recently was the September ISM in the U.S. (51.6). It was the highest since June while auto sales topped the best level since April last month. The collapse in investor sentiment was driven by the political inaction in Europe, not recessionary data. The economic data just doesn’t back the hard landing thesis so far. U.S. auto sales rose to a better-than-expected 13.1 million units annualized pace in September, helped in part by restocked inventories at Japanese automakers. That’s the strongest level of sales since April, and left sales 10.8% above year-ago levels, yet another signal of moderate growth in the U.S., and not an outright contraction. This is also shown in the chart below which is the Composite ISM index in the U.S. (the combination of the purchasing manager’s index for both manufacturing and services). Any number above 50 generally indicates economic expansion while numbers in the 44-50 range show stagnant growth and numbers lower than 44 generally indicate an outright recession. While the index recovered sharply following the 2008-09 recession, it has slowed since but remains comfortably above the key ‘50’ level.
Corporate CEOs are also supporting the stronger economic views during their reporting periods and in their guidance for the 4th quarter. Exceptionally strong results from companies with extensive global reach such as Intel, Caterpillar and Dupont support this outlook. Rio Tinto Group, the world’s 2nd largest mining company, commented that “concerns arising from the European debt crisis that have shaken world markets don’t reflect the real economy as demand for iron ore, coal and copper all remain strong.”