At the close of business last Friday, global equities experienced heightened volatility but gained in the first week of October amid concerns over the US debt limit, rising rates and higher inflation.

The yield on the benchmark 10-year US Treasury note increased to 1.61% from 1.49%, while the price of a barrel of West Texas Intermediate crude oil continued climbing to $79.78, moving over $80 for the first time since 2014. Volatility, as measured by the Cboe Volatility Index (VIX), dropped to 18.7 after reaching a high of 24.5 earlier in the week.

 

MACRO NEWS

October: trick or treat?
While October may have a poor reputation, the fourth quarter has been mostly positive for stocks. The S&P 500 Index has averaged outsized gains of 3.9% in the fourth quarter and has gained four out of every five years since World War II.

The next-best quarter is the first, with an average gain of 2.3%. The worst is the third, up just 0.6%. The S&P 500 eked out a small gain for the third quarter of 2021, but was down nearly 5% in September.

October is remembered for stock market crashes like those in 1929 and 1987. The market has usually been positive. The S&P 500 has typically gained in the fourth quarter when it has been up solidly year-to-date heading into it. Similarly, the Dow has gained 60% of the time in October over the past fifty years, averaging an increase of 0.5%

The International Monetary Fund expects global economic growth in 2021 to fall slightly below its July forecast of 6%, citing risks associated with debt, inflation and divergent economic trends in the pandemic’s wake.

Our view:
The US, Canadian, and European equity markets continued their strong rally from 2020 through the first nine months of 2021. Emerging markets, however, have lagged. Investment sentiment changed quickly in September because of the increase in the COVID-19 Delta variant, Evergrande in China, the debt ceiling debate in the United States and an increase in energy prices. However, over the medium term, there may be even more reasons for optimism, including accommodative monetary policy, good global economic activity, strong earnings growth and cheaper valuations.

Almost every success story involves some bumps along the way. With investing, the best results may come to those who keep an optimistic outlook while taking an analytical approach to their portfolio.

We believe global economies will continue to recover, supported by consumer spending, accommodative central banks and increased vaccinations globally. We expect earnings growth to remain strong into 2022. Despite what you may read in the papers, we expect both the Federal reserve in the US and our Central bank in Canada to remain accommodative through the first half of 2022.

We think oil prices will stabilize around $75.00 per barrel, meaning gas prices at the pump will remain high. We believe the Canadian dollar could rise to 83 cents to the US dollar over the next year.

In looking at the companies held in your portfolio, we think it is fairly valued where many of the companies in global indices appear to be richly valued. We believe the following asset classes will perform well over the next twelve months: Canadian equities, US large and small cap equities, emerging market equities and gold. Dividend growers have historically outperformed the index in both Canada and the US.

We expect the manufacturing recovery to continue well into 2022, as it will continue to take time to fulfil the backlog and replenish inventories. Corrections are normal and we experienced a selloff in September. It is important to remember that your fund managers were active buyers during the selloff. As an investor, you are rewarded when your fund managers buy during periods of market selloffs. After this weak September, we believe we are headed into a strong period for global equities.

We believe inflation is going to continue to run between 2.5 and 3 percent over the next year, but that increasing commodity prices will lead to lower long-term inflation.

Potential impact of the chip shortage
The semiconductor chip shortage that is hamstringing the production of products ranging from cars and computers to appliances and toothbrushes will extend into 2022 and potentially beyond that.

The automobile industry, which has been perhaps the hardest hit by the lack of semiconductors, would welcome any chip inventory relief. Overall, we expect US auto sales to drop at least 13% in the third quarter because of disrupted production tied to the chip shortage. The shortage of semiconductors has also shifted some of the planning as it relates to the supply chain.

New COVID pill
Merck and Ridgeback Biotherapeutics said they’ve developed a pill that reduces the risk of hospitalization or death by around 50% for patients with mild or moderate cases of COVID-19. The companies plan to seek emergency authorization for the drug, molnupiravir, which works by inhibiting the replication of the coronavirus inside the body.

The phase 3 part of the trial was conducted at over 170 sites in countries including the United States, Brazil, Italy, Japan, South Africa, Taiwan and Guatemala. If authorized by regulatory bodies, molnupiravir could be the first oral antiviral medicine distributed for COVIDs.

 

CANADIAN ECONOMIC NEWS

As I’ve stated in client meetings, we are warming up to increasing Canadian equity exposure. Canada has now recovered all the roughly three million jobs lost to COVID-19. Our country added 157,100 jobs in September. Our unemployment rate is now 6.9% percent.

 

US ECONOMIC NEWS

The US economy created jobs at a much slower pace than expected in September as the number of nonfarm payrolls rose by just 194,000 in the month compared to the Dow Jones estimate of 500,000, the US Department of Labor reported.

A decline of 123,000 in government payrolls hurt the headline number while private payrolls increased by 317,000. The unemployment rate fell to 4.8%, against expectations of 5.1%.

Market cheers lifting of US debt ceiling
US Senate Minority Leader Mitch McConnell offered a short-term suspension of the US debt ceiling to avert a national default, which Senate Democrats accepted. The deal raised the debt ceiling to allow the government to keep operating until December 3rd. The bill now moves to the House, where Speaker Nancy Pelosi (D-CA) is expected to take up the legislation early next week.

Earlier in the week, Secretary of the Treasury Janet Yellen said the economy would fall into a recession if Congress failed to address the borrowing limit before an unprecedented default on the US debt.

 

EUROPEAN ECONOMIC NEWS

Germany is a step closer to a Socialist-led government after formal coalition talks between the Social Democratic Party, Greens and pro-business Free Democrats look set to begin

British soldiers have begun delivering fuel in the United Kingdom as the panic buying of gasoline continues in some parts of the country. While the situation has improved in most parts of the country, shortages remain acute in London and England’s southeast. The U.K. has an estimated shortage of 100,000 truck drivers, which has disrupted the delivery of fuel, food and goods around the country.

 

JAPAN, CHINA and EMERGING MARKET NEWS

Stress spreads beyond Evergrande
On the heels of developer Evergrande’s debt crisis, there have been increasing signs of stress in China’s property market. Credit rating agencies have downgraded developers Fantasia Holdings and Sinic Holdings over risks from their strained cash flow situations.

Fantasia did not repay the principal amount of $206 million of a bond that matured on Monday, it said in a filing to the Hong Kong exchange. Also, Evergrande will sell part of its stake in its property services unit, the second asset sale in as many weeks as the liquidity-squeezed property giant scrambles to raise cash. Bondholders are concerned that Evergrande is close to defaulting on debt payment obligations as it faces nearly $150 million in offshore payment obligations next week.