I am glad that today is October 31st – not because it is Halloween but because today we conclude the worst monthly return for stocks since the Great Depression (subject to today’s stock market performance). I’m very ready to move on and close this chapter in the history books.
Historically, November has been a better month for stocks and we have typically seen a Christmas rally. Although stocks really don’t know what time of the year it is, they do move on news.
The big news, in the short-term, will relate to how quickly the U.S. residential real estate market is slowing and its impact on the economy. We need to see a floor in U.S. housing prices and prices are starting to bottom. We are certainly seeing less speculation.
The MSCI World Index – a global stock market index of 23 developed countries has dropped 20% in October (in local currency, less in Canadian dollars, since the Canadian dollar also dropped significantly thereby offsetting losses for Canadian investors). It is headed for the worst month since records began in 1970, as central banks and governments from Washington, London, Beijing and Tokyo stepped up efforts to salvage the global economy amid the deepest financial crisis since the Great Depression.
Stocks climbed yesterday as investors bought up shares trading near their lowest levels in the last five years. Investors are becoming more optimistic that the recent rate cuts by global central banks (Japan just cut their rate to 0.30% this morning), will help cushion a worldwide economic recession or contraction.
Investors also found optimism in signs that efforts to unthaw the frozen credit markets were starting to work as the rate that banks charge to lend to each other fell (LIBOR continues to fall), thereby getting money or cash back into the economy and moving.
Although data yesterday showed the U.S. economy experienced its largest contraction in seven years (the last minor recession) in the 3rd quarter, this was offset by a more favourable Gross Domestic Product (GDP) reading in the 3rd quarter than expected (only contracted by 0.30%).
This morning, Barclays bank in Britain (2nd largest) raised 7.3 billion pounds ($11.8 billion $U.S.) by selling securities to investors including funds in Abu Dhabi and Qatar to shore up capital without tapping into the U.K.’s bailout plan. The stock is down 6% this morning but that is a positive because it demonstrates that good banks can still raise capital from private investors (although, with security and interest rates around 10%) and that the stock doesn’t drop as much on these announcements as they once did.
This will be a long road ahead (there is no short-term fix) and there are opportunities, but stay diversified. Since we have had a 3 day rally and it’s month end, I would expect stocks to be a little volatile today with a downward basis today.
Wilfred Vos Bcs, CFP, FMA, CIM, FCSI, DMS, CFA, CBV, MBA
SVP & Partner ROI Capital
