Markets have bounced higher as we enter the final quarter of the year. Seasonally speaking, October and November tend to be good months for equity markets and often for the most beaten up stocks and sectors. This trend reverses in December as tax-loss harvesting once again puts pressure on underperforming names. Global equity markets (MSCI ACWI) fell almost 15% since their intra-year peak in May and, starting on September 29th, has now bounced back over 7%. US equity markets (S&P 500) have fared a bit better, falling only 12% intra-year and has increased almost 8% from the low. One of the most challenged sectors, energy, fell 28% from its intra-year peak only to rise 18.5% from the low (measured by the S&P 1500 energy sector). Amazingly, 14.5% of that bounce occurred after September 30th once window-dressing and other technical issues abated. In this environment, a difference of time in days can mean a big difference in the value seen on a report. We are now entering an important period for equity markets as earnings are announced and next year guidance is given. Analysts have quickly revised down 2015 levels, but so far 2016 has not been touched. In our view, equity markets are already discounting revisions lower for next year with the difficult question being how much is “priced in.”
European data looked a bit weak this week, particularly in German trade figures for August. Germany has the highest sensitivity within Europe to a China slowdown (China accounts for 7% of their exports and the pace of export growth fell from 10% in March to -8% in July). Therefore, it appears that the benefit of a depreciating euro to the export-led economy may be offset to some degree by a slowdown in global growth. Surely the European Central Bank (ECB) has taken notice. With expectations for Fed action being pushed further out the calendar, the euro has again strengthened relative to the US Dollar back above 1.13 and trending towards 1.14. It is only logical that the ECB may come under pressure to increase their current quantitative easing program (either in length of time or size of monthly purchase) to keep the pedal down on monetary acceleration.