The S&P 500 had a modest gain in September but struggled to make new highs while the Canadian market gained 1.5% and has outperformed U.S. over the past year. Both indices recovered partially from August’s lackluster performance. Gold and silver retracted modestly after strong performances since May. Oil, measured by WTI was up 1.8% in the month.
Are lower interest rates good for the economy?
September brought us a fresh round of interest cuts in the US, the European Union, China and Australia. During the global financial crisis, central banks around the world cut interest rates and injected liquidity into the financial system to forestall adverse effects on the broader economy. Financial markets recovered and went on to stage the longest bull market run in history. Today the expectation is high for central banks to prevent a recession through cutting interest rates when needed or as a “insurance” to prevent economic growth from weakening.
S&P500 Performance when the first two rate cuts are 25 bps
But the question remains: can the central banks continue to moderate economic cycles and avoid recessions forever? What happens when the economy becomes reliant on the continued supply of cheap credit and bad decisions are not corrected by normal contractions of the economic cycle?
Given the size of the global economy, the ramifications of prolonged low or negative interest rates can take many more years for investors to appreciate. For now, we know that despite the aggressive actions of the European Central Bank, the Eurozone economy still shows anemic growth and in the U.S. the mere threat of rising interest rates can spook the markets.
How is U.S. Q3/Q4 earnings season likely to shake out?
The latest data shows projected growth to slow to +0.8% for Q3 and +1.4% for Q4. The path of revision for earnings projections are modeled after historical patterns. The trajectory shows the likely path of revisions on earnings growth. Traditionally, company management tries to manage investment analysts’ expectations by setting forecasted growth lower in order to beat the earnings expectations later on. As a result, analysts also adjust for this bias accordingly.
Headlines that have not moved the market
Energy, the Saudi ripple effect – 10 days later
Brent prices opened 19% higher on the first day of trading following the attacks on the Abqaiq facility and Khurais oilfield. The initial spike in prices have eased since. Part of the softening was due to the degree of pent up hedging from energy companies. They had a brief opportunity to lock in a one year forward price at $58.5/bbl, a level not attainable since the early summer. While Asia may be disproportionally impacted by the disruption, the Chinese government suggested that it currently carries 80 days of import cover. Should the region’s geopolitical risk intensify, the US may be one of the few regions with slack to serve as a replacement.
Presidential Impeachment
So far the impeachment inquiry has not impacted the market. This is partially due to the unpredictability of the proceedings and partially due to the lack of immediate impact on the real economy. However, the impeachment proceedings will likely dominate the news for weeks to come and overshadow democratic debates on issues such as the healthcare and environment. The celebrity apprentice - the white house saga continues…
Rita Li works with professionals and business owners to provide tailored investment advisory service and wealth management planning. Her team comprises of professionals with in-depth taxation and legal expertise, together, they deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with experiences at top ranked investment firms in Canada and HongKong. Rita has her MBA from Richard Ivey School of Business.
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