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Stocks have charged forward in October following seven straight months of losses. At the time of writing, the Canadian stock market (as measured by S&P/TSX index) has gained 4.8% so far this month while the S&P500 index in the U.S. is up a whopping 10.8%, its best single month gain since 2009. The leadership in the market has also switched back this month to what worked in 2009-2010, which was the cyclical and resource stock trade. In Canada, Energy and Basic Materials are leading 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 be the plethora of economic data, both in the U.S. and globally, that have been stronger than expected and thrown some cold water on the idea we were heading straight into another recession less than two years after coming out of the prior one. This 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 managers 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.”