David Rosenberg, chief economist with Gluskin Sheff + Associates Inc.Deborah Baic/The Globe and Mail
Don't look now, but the Dow made it to positive terrain for the year Monday (albeit barely). As of Tuesday's close, the Dow is up 0.5 per cent, the S&P 500 is up 2.5 per cent and the Nasdaq has rallied 8.6 per cent so far in 2015.
The rally in the U.S. stock market generated $1.8-trillion (U.S.) of incremental paper wealth in October – the Dow surged 8.5 per cent, the S&P 500 jumped 8.3 per cent (five consecutive weeks of gains) and the Nasdaq spiked 9.4 per cent.
We have not had a month like this in four years (before that was March, 2000) – which also followed a serious corrective phase in the market. The S&P 500 is now up 13 per cent from the Aug. 25 bottom.
Much of the uncertainty gripping the markets in August and September has receded – highlighted by the 42-per-cent plunge in the CBOE's market volatility index (VIX) this past month.
Retail investors are finally showing some confidence, so this isn't just short-covering – plowing $14.6-billion into equity funds in the week ending Wednesday, which was the largest inflow in six weeks.
The rebound has gone global, too – the STOXX Europe 600 index climbed 8 per cent in October in the steepest gain since July, 2009 (and up nearly 10 per cent for the year versus a "flat-ish" U.S. market). Japan's Nikkei was a leader, up 9.7 per cent, and that was the best showing since April, 2013.
Whatever happened to China pulling us into a full-fledged bear market?
While the narrative is so bearish, let's take stock of some of the positives out there.
– The U.S. Federal Reserve left the door open for a rate hike at next month's Federal Open Market Committee meeting. In contrast to the previous meeting, the Fed feels more confident about the outlook – Fed funds futures are now priced halfway toward a move compared with just over 30 per cent a week ago. The central bank has found its footing and the communication problems it experienced with the market six weeks ago have subsided.
– Beneath the veneer of that inventory-induced tepid 1.5-per-cent annualized growth headline in third-quarter real GDP, U.S. private domestic demand is running north of a 3-per-cent annual rate.
– The U.S. Senate passed legislation (64-35) on Friday that boosts spending levels and lifts the debt ceiling for two years. This is big.
– It has to be stressed that the promotion of Paul Ryan to the role of Speaker of the U.S. House of Representatives has taken the odds of tax reform sharply higher (likely after the election, but the trail may well be blazed in 2016 for implementation in 2017). So why is he different? Because Mr. Ryan is the first chairman of the tax-writing House ways and means committee to be elected Speaker since 1843.
– U.S. President Barack Obama is starting to adopt a tougher foreign policy stance – nothing like reigniting some American muscle (as in deploying Special Forces on the ground in Syria and sending a message to Beijing with the U.S. warship patrol in the South China Sea). The United States is also considering whether to bolster its naval assets in Europe in response to the stepped-up presence of Russian warships and submarines near Cyprus.
– This hasn't made it to the front pages yet, but the reason why the Islamic State is no longer making the news is that the Shiites are claiming some major victories in Iraq.
– Macro and market conditions in the emerging-market space have stabilized – in fact, China's Shanghai equity-market index in dollar terms is up 20 per cent from the August lows (and nearly 3 per cent for the year).
– Commodity markets seem to have formed a trough – Brent crude was up 1.5 per cent on Friday and 3.2 per cent on the week to a snick below $50 a barrel.
– The earnings reporting season is, yet again, modestly beating consensus views – yes, with energy, the numbers look poor with earnings showing a 1-per-cent year-over-year decline and minus 3.6 per cent for revenues; strip energy out, and those figures are 6.3 per cent and 1.7 per cent, respectively. How bad can things really be when consumer-discretionary companies' profits are 13.5 per cent year-over-year?
– The pressure in the high-yield corporate bond market has eased, with yield spreads over U.S. Treasury securities collapsing more than 90 basis points in just the past month to below 600 basis points, the tightest they have been since mid-September.
All that said, let's keep in mind some of the market rally shortcomings, notably the lack of breadth.
Fully 52 per cent of the S&P 500 stocks are trading below their 200-day moving averages and only two of the 10 equity sectors (tech and consumer staples) are above their mid-August highs.
As well, it has truly been a mega-cap rally as the small-cap Russell 2000 index has lagged behind by some 800 basis points during this bounce-back.
And while November is traditionally the second-best month of the year for equities, it is typical to see a flat performance when October is up 5 per cent or more.
But the major point here is that even with the equity market now back to being fully priced, at the least, the cyclical bull phase remains intact and the few brave souls who bought the dips instead of selling the rallies sure seem to have the upper hand right now.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.