Covenant Weekly Market Synopsis as of October 30, 2015

November 2, 2015

Following two difficult months (and the worst quarterly performance in more than four years), global equity markets staged a massive rally in October recording their single strongest monthly performance in four years. The rally, which produced high-single-digit returns amongst developed and emerging market stocks appears to have been spawned by expectations of additional monetary stimulus from the People’s Bank of China, the Bank of Japan and the European Central Bank. The strong relationship between loose monetary policies and positive stock market performance in the absence of real economic growth has been a hallmark of the ongoing recovery from the Financial Crisis.

The reaction of fixed income instruments was more muted, with the yield on the UST-10 year bond rising a mere 0.06% to 2.14% during the month, although high yield spreads declined nearly 0.7% in sympathy with rising equity prices. Hard assets prices generally rose on the month, though gains were less impressive than equities with gold and crude each rising between 2% – 3%.  Additional market detail can be found here.

Sibling rivalry – After more than 40 years of controlling population growth by limiting married couples to a single offspring, the Chinese government increased the number of allowable children to two per couple.  The law was originally designed to prevent population growth from outstripping China’s resources, but it had at least two unintended consequences: 1) it led to the murder of countless infant girls as men were desperate to perpetuate their family name by siring a son; and 2) over time the math of replacing two parents with a single offspring created a declining and aging population in China.  The Chinese government’s decision to allow two children per couple does not signify an altruistic shift towards improved human rights in that country, but rather a practical effort to reduce the negative economic effects of an aging population and declining workforce. For the first time in more than a generation, the Chinese will now have a new parenting challenge:  sibling rivalry. 

2011 Redux? – As has been well documented, the third quarter drawdown in stocks and the subsequent rally in October both resemble equity market performance in 2011. If the similarities to 2011 continue to play out, what can we expect from equity market performance through year-end? The answer is that equity market performance will be slightly negative for the balance of the year. This is not a market call, merely an observation of the parallels between this year and 2011.

 

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Economic Wrap-Up – Annualized third quarter GDP growth was +1.5% as strong private consumption (2.2%) was offset by the drag of elevated inventory levels (which subtracted 1.4% from third quarter growth). All in all it was a decent report, consistent with previous quarters showing the U.S. economy continues to expand at a moderate pace.

Be good,

Jp