Market Currents

• Global markets staged an impressive rebound after exiting the seasonally weak months of summer, where the S&P 500 fell into correction territory (characterized by a 10% pullback from its highs) for the first time since 2011.

• Seasonality performance-chasing definitely played a role, but a global economic outlook (especially of China’s) and corporate earnings landscape that are not as bad as feared likely lend some fundamental credence to the market recovery.

• With the majority of the S&P 500 companies having reported their earnings, more companies are reporting EPS above estimates (75%) compared to the 5-year average. However, blended earnings growth still saw a decline of -1.6%, marking the first back-to-back quarters of earnings declines since 2009.

• Most of the earnings decline stem primarily from energy stocks, as low oil prices continue to weigh on the profitability of the sector. Ex-Energy, S&P 500 growth was positive, with health care and consumer discretionary sectors registering the strongest growth.

• Even as earnings growth in the discretionary sector is strong and consumer spending remains healthy, the big theme of the season is the carnage with old-line retail stocks. The bricks-and-mortars struggled as stiff online competition continues to dominate a bigger market share.  Perhaps tellingly, Amazon’s market cap is now higher than the combined equity values of Walmart, Target, TJX and Macy’s.

• Further supporting risk appetite was a Chinese rate cut and speculation over the prospect of looser monetary policy from several other central banks, including the European Central Bank.

• The tragic terrorist attacks in Paris failed to de-rail the rally, and instead seemed to bring together unlikely allies (Russia, Anonymous hacker group) in the war against ISIS.

• The statements from the Federal Reserve raised the prospect of an interest rate “take off” in December, but the market chose to focus primarily on the more reassuring assessment of the global economy. Policy clarity, together with a promise to go slow with the rate hikes, lend confidence to investors and shapes the market to chase a year-end rally.