A bad day in a great month for global stocks

Global stock markets enjoyed their strongest month in at least two decades in October, but enter November facing a growing wall of worry.

Higher-than-expected profits and optimism that Europe would find a way to contain its two-year-old debt crisis fuelled a 13.6 per cent rise in the MSCI World Index, its biggest monthly gain since January 1975. In the United States, the S&P 500 jumped 10.8 per cent during the month, the most since December 1991, while Canada's S&P/TSX composite index rose 5.4 per cent in the period, its sharpest climb since May 2009.

But major indexes ended the month on a down note. The S&P 500 and the TSX composite both slid more than 2 per cent Monday as Greek Prime Minister George Papandreou said he would put the European Union's new deal on financing for Greece to a referendum, a move that could delay or derail the proposed rescue plan.

Analysts and fund managers are weighing renewed concern over Europe against what has been a strong season for corporate earnings in Canada and the United States.

"Europe deserves points for trying, and U.S. economic data have also brightened," Avery Shenfeld, an economist at CIBC World Markets Inc., said in a research note Monday. "But equities have recovered a lot of lost ground, and it's going to be much tougher to grind higher from this point ... That suggests staying defensive in asset selection while the spectre of downside risks is still out there."

The trigger for October's gains were the unveiling last week of a plan to buttress the European Financial Stability Facility, combined with another quarter of robust corporate profits and brighter U.S. economic numbers.

About half of Canadian companies and three-fourths of U.S. companies that have reported financial results for the latest quarter have exceeded analysts' estimates for earnings, according to data compiled by Bloomberg. U.S. GDP numbers unveiled last week showed that growth in gross domestic product accelerated in the third quarter, easing concerns about a recession in the world's largest economy.

"A number of economic statistics were actually turning positive, and the early earnings reporting of October showed most companies were beating expectations," said Domenic Grestoni, who oversees the $13-billion Investors Dividend Fund at Investors Group in Winnipeg.

"Earnings are key," Mr. Grestoni said. "The news there still appears to be pretty good."

There's also plenty of bad news, and it's global.

Greece is still in the emergency room and needs money to pay its bills. Meanwhile, yields on Italian government bonds have risen to their highest level since the birth of the euro in 1999. The lack of specifics on the euro zone's latest rescue attempt worries observers, who wonder if it will prove any more viable than its predecessors.

There is also the spectre of a slowing world economy. China's expansion slowed last quarter, the International Monetary Fund cut its outlook for global growth last month, and Canada's central bank slashed its economic growth forecast last week. Apple Inc. and Amazon.com Inc. are among companies whose latest earnings fell short of analysts' expectations.

History doesn't provide obvious clues about what may lie ahead for market returns. In the 27 months since 1930 that the S&P 500 has risen more than 10 per cent, it has climbed the following month only half the time, according to a study by Bespoke Investment Group LLC.

One of the strongest supports for equity prices is the fact that dividend yields in many markets remain above bond yields. Investors in search of yield have few places to turn other than stocks.

Even with the jump in stocks in October, most major stock markets remain flat or down on the year. In Canadian dollar terms, the S&P 500 is up 0.16 per cent since January while the S&P/TSX composite is down 8.86 per cent.