Lack of US earnings' disappointments and a quiet euro zone making for an uneventful October
North American stock markets rebounded smartly after last week’s losses as the overall tenor of the market improved on the back of upbeat US corporate earnings and forward progress on a single banking regulator for the euro zone.
Although earnings have been far from stellar, the market had been prepared for much worse as many analysts had forecast the first large-scale quarterly profit drop for US companies since 2009. The reality has been better than that which helped set the table for other positive surprises which came in the form of US economic data. Home building numbers released Wednesday surged in September to their highest level in four years. The figures easily surpassed estimates providing further evidence the housing market is back on track. September also appeared to be good for US retail sales which rose 1.1%; again exceeding expectations.
The good news came to an end Thursday on two different fronts. The number of people in the US filing for jobless claims unexpectedly rose while Chinese GDP fell. The number out of Beijing was 7.4% in Q3, down from 7.6% in Q2. The releases took some of the wind out of the markets’ sails Thursday, as did poor earnings out of the American tech sector.
Meanwhile in Brussels, euro-zone leaders were making progress in their attempts to finalize the creation and workings of a single banking regulator for the troubled region. Also on the table were plans for a common budget. Taken together, euro-zone worries have subsided of late and this, in addition, to the good news out of the US has made for an uneventful October thus far; a month normally fraught with worry. Indeed, it was 25 years ago today that the Dow lost a quarter of its value in what became known as Black Monday. Interestingly, a US$10,000 investment in the Dow stocks the day after – October 20 – would be worth more than $137,000 now, according to Morningstar.
TSX notches four straight days of gains, US advance stalls at three
The TSX posted strong gains over the four-day period with the index adding 264 pts. to close at 12,466. US markets failed to keep up with the TSX through Thursday with the Dow adding 220 pts. to close at 13,548, the S&P 500 advanced 29 pts. to 1,457 and the Nasdaq added 28 pts. to finish at 3,072.
Continuing to favour cyclical stocks
- Equities. Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “the Chinese economy is in the process of bottoming. We expect growth to accelerate into 2013. We continue to favour cyclicals (financials, energy, materials) over high-yielding defensives (REITS, utilities, telcos). With the US economic picture brightening, China bottoming, and tail risk declining in Europe, now is the time (particularly on pullbacks) to put excess cash to work in equities.
- Fixed income. Andrew Mystic, Associate Director, PAG, highlights the following recommendations: “Term Call – given the recent decline in yields, we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – new call – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”
- Portfolio strategy. Scotiabank GBM Portfolio Strategist Vincent Delisle says: “recovering US housing should push long-term bond yields higher, thus sustaining leadership from US Financials, Homebuilders, and lumber stocks.”