Investors welcomed November with open arms, after an incredibly volatile month of October.  There was a feeling that we just had to "get past" October which has always been a seasonally weak period in the market.  When combined with uncertainty regarding rising interest rates, persistent trade disputes, mid-term elections, a rising dollar, and slower international growth, you had a 'perfect storm' that brought a swift 10%+ correction (similar to the one investors experienced in February of this year).

We have been making it a point to communicate the notion that investors need to accept that this volatility may not end in October.  Rather, they should at least be prepared to watch it continue well past the mid-term elections of November.  We have been also trying to prevent clients from getting overly excited on those days where the markets are rallying higher with lots of "green on the screen".  It is prudent for us to remind clients that the word "volatility" works both ways... on the way down, but also on the way up. We saw a great surge upwards in the market a few days prior to the mid-term elections and especially the day after. There was a sense from the markets that people wanted to declare a temporal victory of having gotten past the mid-term elections without any major surprises.  Being able to "check off" one event among the list of uncertainties mentioned above was reason enough to cheer. However, even with the mood turning more positive, we refrained from telling clients to get too aggressive in buying new stocks.  This is not to say that we do not believe markets should go higher.  (They are, after all, in oversold levels, and the forward PE valuations for the TSX and S&P500 are looking very attractive at only 13X and 15X, respectively).  Still, in our view, the major narrative of the market has not yet changed, and for this reason, we continue to believe that in the short term, we will see some positive bounces, however, we may have to wait for these bounces to become sustained bull rallies.

So, what are we looking at and waiting for?

First and foremost, the overall positive trend is still intact.  We always talk about "fundamentals", and they continue to be in expansionary territory:

1) Economic growth, as reflected in GDP, remains comfortably positive

2) Thus far, corporate earnings are very healthy with 77% of companies beating earnings expectations

3) Recession signals are still far away, whichever indicator you want to look at (yield curves, PMI, ISM, U-rates, LEI indicators etc...)

With that context, we see a potential recovery occurring.  However, it will transpire in either two speeds - quickly or gradually.

The case for a quick turnaround will depend on whether we can get a catalyst. The most obvious catalyst would be if Mr. Powell (US Fed Chair) publicly changed his tune on raising interest rates, currently understood to be once more in 2018 and three more times in 2019.  The market sees this as too aggressive and too-much-too-soon. Any rhetoric that signals the Fed will be more "data dependent" in their future plans for rate increases could be a turning point.  The "best" opportunity given to him for such an announcement would be right after the December rate hike. Another potential catalyst would be if China and the US made progress in their trade talks. At this moment, no one expects a deal to be signed, however, the G20 meetings scheduled for Nov 30th in Buenos Aires will provide an opportunity for the two countries and leaders to show that talks are serious and progress is being made.  These two uncertainties (rates & trade) remain the key overhangs on the market, and any resolution may provide a sharp and quick rally.

The case for a gradual turnaround depends less on specific events or outcomes.  Rather, the recovery becomes a process. It is a scenario where the market eventually "saves" itself and gradually climbs higher, often without many investors taking notice. We view this as an approach that slowly strings together small building blocks towards a higher market. Examples of these building blocks include the following:

1. Year-end “window dressing” season for fund managers is finally winding down (often Sept/Oct/Nov)
2. Record corporate stock buybacks continue (after the previous blackout period)
3. Seasonal trends typically bring a "holiday rally" by year-end
4. Q4 earnings are good, especially since guidance and expectations have been brought lower
5. Markets get desensitized and worry less about the same "old" issues of rates & trade

At this moment, although the fundamentals are flashing positive, we do believe the short term may still bring a little more downside (of course we would be happy to be wrong!). That said, we believe there are still some "weak hands" out there that need to be flushed out and they need to do their last bit of selling before a sustained rally can continue. One more swoon of selling would be healthy, and then the market has a chance to move on.