Stock market volatility increased in July as a variety of developments pulled markets in different directions.  While the markets were showing all the signs of a technical breakdown early in the month, the end of the immediate crisis in Greece kick-started the market higher in mid-July.  European stocks recovered after falling 15% from their April highs and Chinese stocks snapped back after a 30%, three-week decline.  U.S. growth stocks remained the stalwarts of the global stock market, with many names trading to all-time highs, in both price and valuation!  U.S. stocks have now gone without a 10 percent retreat from a peak for almost 1,400 days, the third-longest stretch ever.  The bad news for Canadian investors was that the resource sector slid back into another bear market.  Oil prices reversed direction after climbing to over US$60/barrel during the first half of the year.  Industrial metals such as iron ore and copper slid to new lows and the gold market finally broke out of its narrow trading range to the downside as a strong U.S. dollar and continued Asian selling pushed bullion prices below US$1100 for the first time since 2009.

While we continued to outline our cautious view on financial markets over the past year, we recently also had to pay attention to the onslaught of second quarter earnings reports and forward guidance from companies in various sector and geographic regions to get a clearer picture on where the global economy is headed amidst all the volatile news headlines about Greece, China, central banks, commodity markets and even the idea that Donald Trump could be the Republican Party nominee for the Presidency in 2016!  Back on Planet Earth however, the plethora of earnings reports and economic data over the past month have done nothing to make us feel more optimistic about the economic or market outlook over the balance of 2015.  While the average number of companies beating earnings is the same as it has been for the last few years, it has to be pointed out that expectations were very subdued going into the reporting season so the ‘bar had been set low.’  Negative growth from the Energy sector and the headwinds of a stronger U.S. dollar have lead to a decline in earnings for the last three quarters.

S&P Operating Earnings

While most analysts are still expecting a return to positive earnings growth in the back half of 2015, this type of growth does not seem sufficient to support stock valuations that are at all-time highs.  Stocks can rise because of earnings growth or higher valuations, but neither of these look like they will be working in the stock market’s favour in the near future.  Moreover, the record valuation levels are being supported by ‘near zero’ interest rates, a condition which cannot remain in place indefinitely.

The recent 30% collapse in Chinese stock prices over a 3-week period should be a ‘wake-up call’ to everyone about how volatile stock markets can be, especially after such large gains over the past six years and worries about the continued support from a global ‘zero interest rate’ policy.  While Chinese stocks have rallied since those lows, but those gains have to be put into perspective as over 1000 share issues remained untradeable, large institutions were restricted from selling stocks and the government authorized a $200 billion support program for the market.  It would be a shock if stocks couldn’t rally under those conditions.

The global economic data continues to be disappointing.  While the ‘official’ numbers from China still show 7% growth, the independent measures are showing more weakness, including the ISM index falling back well below the key level of 50, which suggests economic stagnation.  The U.S industrial data has also not rebounded as much as expected following the soft first quarter data.  European economic numbers have also slipped again recently, particularly in Germany and France, despite the tailwinds of a sharp fall in the value of the Euro, the stimulus from the Quantitative Easing policy and the low oil prices.  However, it is the regions outside of the developed markets that are suffering the most now.  Brazil is clearly in recession again but interest rates are actually expected to increase because inflation has risen so sharply.  Russia also continues to shrink, due in large part to the fall in oil prices but also because of the ongoing economic sanctions that were put in place during the Ukranian conflict.  Geo-political risks have undermined growth in Turkey and the reforms in India are not having the anticipated results.  A strong U.S. dollar has forced many emerging economies to raise interest rates to prevent capital outflows as well.  With developed economies as well as the largest emerging market economies all in downdrafts, it’s not a surprise that commodity demand has been under pressure.  Add to that a strong U.S. dollar, and we can see why commodity prices have collapsed and why the Canadian stock market is once again lagging the performance of our southern neighbor.

1 2 3