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Global Markets October 2015 – A Tale of Two Policies

by Invisor Last updated on November 03, 2015 Tags: Market & News Updates

Following last quarter’s fear induced drop in global equities, markets rebounded significantly in October.  The S&P 500 alone had its strongest month in four years.  The uptick was largely on the back of global central banks continuing their quantitative easing (QE) programs and investors’ renewed confidence in solid economic fundamental data.  But, while the performance was very positive, these gains merely recaptured the losses incurred in August and September. Still, we are starting to see equity markets shed some of the fear that has accompanied us these past few years. 

Source: Bloomberg

The story of the markets right now is a tale of two policies. The U.S. Federal Reserve (the Fed) who look to restrain growth by raising rates and most other global economies that are continuing their QE strategy, by adding liquidity and stimulating their respective economies. These counter approaches will continue to keep global economies in flux, but we believe that global fundamentals along with strong levels of corporate and market liquidity will keep markets trudging forward and minimize any threat of significant market downturns.

U.S. Economy and the Fed

Economic data in the U.S. has continued to be very positive.  Unemployment claims are at their lowest level since 1973 when there were 77 million jobs in the U.S., versus 142 million today. The number of people working in the U.S. has never been higher. Housing sales are up year over year, which is a positive sign for consumer spending capacity.  Corporate earnings, although down from their recent highs, have still come in above analyst’s expectations. Finally, the two-year trend in growth continues to push higher, as seen in the chart below, which shows the two-year data for both GDP and real yields.

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Source: Califia Beach Pundit

While the Fed decided to keep the overnight rate at 0-0.25 per cent in October, they have indicated that a rate rise at the next Fed meeting in December is likely. As we’ve said before, a rate rise is indicative of a growing economy and is a positive step in general.  While the rise may disincentivize some investment in capital, borrowing rates below 1 per cent are still incredibly favourable for investment.  In a nutshell, barring any major negative economic news, all signs in the U.S. point to a rate hike, and one which is much needed as it shows the world that the U.S. economy has healed from the worst recession in 80 years.

Global Easing

Emerging markets saw significant outflows as reduced growth expectations coupled with increasing corporate debt levels stoked fears that the 15 year boom may be nearing a close. More than $340 billion flowed out of emerging markets in the third quarter.  In October, China announced new monetary stimulus in hopes to quell some of these fears.

In Europe, Sweden’s Riksbank extended its easing program while the European Central Bank has indicated that further easing may come in December. Japan continues their QE program and many analysts expect them to increase the pace in the near future.

All of this QE has the effect of keeping global interest rates subdued while providing abundant liquidity in equity markets. It is one of the major reasons equities have recovered from the losses suffered in August and September. 

Canada

The October election did little to rattle Canadian equity and bond markets. Month over month Canadian bonds were relatively flat. Equities in Canada underperformed global equities due in large part to continued weakness in the Canadian dollar and commodity prices, particularly oil. Going forward, it remains to be seen what, if any, expansionary policies the new government will unveil to stronger growth in the economy.

It’s Not Market Timing, It’s Time in the Markets

There is a key message in all of these swings. Looking back on the poor returns in August and September, if you had sold out of your investments, you would have missed all of the upside we benefited from in October. The lesson for us is the same – it’s not about timing the market, it’s about your time in the market. To get the most out of your investment plan, learn about the value of receiving truly independent financial advice

We believe that given the level of liquidity in the system now, global markets are robust.  Global economic fundamentals are positive and we will see long term growth as a result, despite the perceived weakness. We expect to see an increase in U.S. rates soon, if not December, then early next year. In global markets, and especially in Canada, we see the U.S. economy as the plow horse that will continue to trudge along and march us through this weakness.

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