Stocks enjoyed another good month during October, with Canadian markets joining US indices in hitting new highs. While large cap growth stocks led US averages, a falling Canadian dollar, one that has now given up half of its summer advance, plus gains in commodity prices, combined to enable value stocks to also work well in Canada. Each of the two Forge First funds delivered positive net returns for October.
Everything appeared to be great for stocks during September as oil climbed 9% and Trump tax talk buoyed small caps and offshore cash rich tech giants. In addition, with inflation remaining quiescent, bank stocks rose on hawkish talk from Fed Chair Janet Yellen. Both funds at Forge First also delivered positive net returns for the month.
Markets have experienced three phases since the election of Donald Trump. First, there was the hope and the hype of the reflation trade which served to overwhelm any doubts about economics or non‑US geopolitical issues. However, the accompanying vertical rise in the price of assets that benefit from stimulative fiscal policy in the US was stopped suddenly in its tracks in early March. By then markets realized that the implementation of Trump policy wasn’t going to be a slam dunk. In addition, US growth was faltering. Yields fell back to test cycle lows while equities rotated in favour of disinflation; phase two was in place...
Q2 earnings have generally been better than expected as roughly 5% of the S&P 500 companies that have reported so far (as at the time of writing) have delivered upside surprises. However, there has only been a few stock price surges in response to positive earnings surprises if you consider Facebook and Apple in the US and Air Canada here in Canada. Excluding these companies, we’ve seen muted price appreciation for positive earnings surprises. On the other hand, we have seen severe stock price declines for earnings misses (recall steady-eddy Cineplex). Bottom line, ex‑energy, S&P 500 EPS growth is running at +9.3% year-over-year. This is a good number, especially given Citigroup’s US economic surprise index which, while improving, remains deep in negative territory. Reasons for the continuing negative economic index include weaker than expected ISM numbers, auto sales staying below the 17 million SAAR for the fifth straight month, and June construction spending unexpectedly contracting...