Oct. 1, 2019
Yes, it’s October
Here’s something different: Some things that could go right as this traditionally chilling month for markets kicks off today.
First, though, Bank of Montreal senior economist Robert Kavcic notes that there’s obviously “plenty that could go wrong” in October, including “the yield curve proving prescient and the trade war going unresolved.”
He was referring to the recent inversion of the U.S. yield curve, which occurs when longer-term rates fall below those of shorter terms and which is seen as a warning sign of a looming recession, and the heated U.S.-China trade spat.
And “it’s pretty clear that the equity market is already discounting slowdowns in the U.S. and global economies,” Mr. Kavcic added in his report.
But, after all that, here are some things that “could go right,” as compiled by Mr. Kavcic:
The October scare
October is seen as chilling because of the “infamous sell-offs” that have occurred during that month historically.
But, for those who are up on their lore but not their statistics, Mr. Kavcic pointed out September has actually been the worst month for equities since 1950, based on the average monthly return, which is a loss of 0.5 per cent, for the S&P 500.
“Looking at this cycle alone, the August-September period has similarly been the worst,” he said.
“October through December has actually been the strongest part of the year historically.”
“As we head deeper into the fall, the lagged impact of plunging interest rates could show up more positively in the economic data,” Mr. Kavcic said, citing the “gathering momentum” of U.S. housing starts, building permits and home sales in the summer.
Canadian housing markets are also perking up after slumping amid government measures aimed at cooling things down. Indeed, Toronto “is starting to smoke again,” Mr. Kavcic said.
Add to all this the fact that “Bloomberg’s U.S. economic surprise index has recently turned positive again after flagging persistent downside misses since late 2018 – and there might be room to run here.”
“The Q3 reporting period is a few weeks away, and expectations are for a sluggish quarter, but maybe that’s a good thing," Mr. Kavcic said.
Indeed, analysts have sent up warning flags for what the third-quarter corporate earnings season may hold. As Mr. Kavcic noted, earnings among S&P 500 companies are expected to be 2.2 per cent shy of the levels of a year earlier, which would mark the first “negative print,” or showing, since 2016.
“We’ll see if the forward guidance confirms current expectations that this earnings contraction will be shallow and brief, improving beyond Q3,” he said.
“For what it’s worth, during the last earnings recession in 2015/16, the market bottomed and then broke out right about when the results on the ground were at their worst.”
The Federal Reserve
The Federal Reserve has already trimmed interest rates, and could well do so again before the year is out, possibly this month.
“Even if they don’t go, one could still argue that we are coming out of this mid-cycle adjustment in good shape,” Mr. Kavcic said.
“This is, policy rates are back below neutral levels and slightly negative in real terms; inflation is stable and subdued, applying no pressure on the Fed to take back those rate cuts; there’s a strong and fully employed labour market, and compelling growth is ongoing in the technology/communications services spaces,” he added, noting, too, that “valuations don’t look too stretched.”
There have, of course, been questions surrounding the fact that we’re now into the longest economic expansion ever, and Mr. Kavcic said he wasn’t trying to downplay the fact that it’s late in the day.
“But sometimes, if the mood is just right, the party goes on past midnight.”
Also hanging out is that whole impeachment thing in the U.S., which some observers, including Mr. Kavcic, don’t see as factoring into market outcomes.
“We kind of don’t see it as having a big impact overall,” he added in an interview.
While that’s the view among some observers so far, that doesn’t mean it couldn’t complicate matters.
“Complications for trade and fiscal policy are likely,” said Citigroup economist Dana M. Peterson. “Investors should watch developments closely, and avoid reaching early conclusions.”
U.S. President Donald Trump will probably continue with his “unilateral, deregulatory and trade policy agendas,” Ms. Peterson said, adding that “the administration may attempt to expedite progress on these fronts to formulate ‘wins’ for President Trump amid the political turmoil.”
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