Stocks and Bonds Rally on Central Bank Easing - Alaska Permanent Capital Management


Stocks and Bonds Rally on Central Bank Easing

PantagesThe S&P 500 closed Friday at 2,075, up 2.1% for the week. Its total return so far this month has been 8.2% and it has gained 2.5% in 2015. Recall that on August 25 the S&P 500 was down 8.1% on a total return basis for the year.

If you haven’t noticed, stocks are rallying like crazy so far in October and on track for the best month in four years! Here are some numbers for key equity markets month to date (in $): China’s Shanghai Composite +12.0%, Hong Kong’s Hang Seng +11.2%, Japan’s Nikkei +8.3%, Germany’s Dax +10.1%, France’s CAC +9.0%, Britain’s FTSE +8.0% and Mexico’s IPC +7.9%. Even dysfunctional Brazil – the BOVESPA – is +7.1%!

The latest batch of corporate profits out this week showed improvement but with 173 of the S&P 500 companies reporting so far, we are seeing a -1.9% YoY decline. Earnings are up 0.2% ex energy. Just over 70% are beating estimates. Earnings at bellwether tech stocks Amazon, Microsoft and Google were all quite strong.

The Thursday edition of the FT notes: “ECB President Mario Draghi sent a strong signal to the markets that the bank is prepared to expand its already massive QE bond-buying program, saying policy makers will make a fresh judgment on whether they are providing enough stimulus when they next meet in December.” He stressed the “downside risks” to both economic growth and inflation in Europe arising from slowing growth in China and other large developing economies, as well as weak commodity prices.

European bond markets (and stocks) rallied on the news. The German two year traded down to yield -0.32% its lowest level on record. Yep, it’s a negative yield. The two year Treasury yields 0.64%. The ten year Treasury ended the week at 2.09%, up a nickel.

Still, the FT has “Bond investors nervous as US debt default looms. The drop dead date for lifting the debt ceiling and avoiding default is November 3 according to the Treasury Department. Is it the 2011 debt ceiling crisis all over again? Not likely. Lessons have been learned and…

Paul Ryan to the rescue! The Thursday announcement that Representative Ryan would run for Speaker of the House has Republicans united and enthusiastic. Bond investors should heave a sigh of relief too. Ryan is a fiscal policy expert and no doubt will want to put the debt ceiling brouhaha behind him.

ISI reckons that it is 90 per cent likely that Congress raises the debt limit in November and approves new two-year spending legislation in December.” 

On Friday China cut rates which helped sustain the global equity market rally. The PBOC cited slowing growth (it fell below 7% last quarter) and very low inflation (it’s about ½ the government’s target).

It looks like retail gas prices in the US could decline from $2.25 a gallon to $1.95 over the next six weeks based on the futures markets. That could mean that the CPI YoY will slip into deflation. It also means that consumers will have more money for holiday shopping.

Despite signs of energy related falling inflation there have been signs of a pick-up in wages. The United Auto Workers union just inked a lucrative deal with Fiat Chrysler. Minimum wages are going up in several states. Wal-Mart is raising wages to $10 an hour. A recent USA Today story notes an ADP report showing average hourly wages rose +3.5% YoY. It’s an apples to apples comparison as it measures raises for employees in the same jobs at least a year.

Meanwhile down south in Canada (You can only say that in Alaska!) a new Prime Minister has been elected with a familiar name. Liberal party leader Justin Trudeau (son of former Prime Minister Pierre Elliot Trudeau) was elected in a landslide throwing the conservatives out of office. He wants more deficit spending and plans to increase taxes on “the 1%.” On the other hand, he promises to keep Canada’s corporate tax rate at 15% (well below America’s 35% which is one of the highest in the world).

The Fed meets next Wednesday and Thursday. No change in policy is expected. Rates to stay close to zero. The fed funds futures market has a less than 40% probability of a rate increase by year end.

Have a great weekend everyone.

Jeff Pantages, CFA®
Chief Investment Officer


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