The Bull Is Back?

After a rough summer, investors got a reprieve in October. As companies started to announce their third quarter earnings, the results were cause for relief. More than usual, those companies beat their earnings expectations and that was in spite of the tumultuous events of the summer. Investors interpreted that resilience as a sign that the US economy continued to be in relatively good health and that the summer’s correction was just a bump in the road.

Investors found some comfort in the news coming out of China. Make no mistake, China is still struggling and is still in the midst of structural reforms to its credit markets, but its stock market finally stabilized. It is difficult to determine whether this is due to the efforts of the People’s Bank of China (PBoC) or just the natural end to the correction, but the result is the same. In addition, the Chinese economy slowed down slightly in the third quarter, but not as much as investors feared. While this news seems like a mixed bag, emerging markets found it sufficient to start their recovery.

Unfortunately, the US economy is also sending mixed signals. Employment figures started to slow over the summer and experts expect that trend to continue into the fall, manufacturing is struggling under cutbacks in the oil industry, and inflation remains lackluster. Investors proved willing to overlook this data, but the Federal Reserve is watching carefully.

The Fed confirmed this in its October meeting. After blaming soft US economic data and “recent global economic and financial developments” in September, when voting not to raise rates, its October meeting brought a similar result. Once again, it decided to leave rates where they are, but it relied on US data for justification and removed any mention of “global” concerns. In the wake of that announcement, US treasury values declined briefly, but rebounded in subsequent days. Since the Fed left the door open to a rate rise in December, investors are anxiously awaiting the next release of employment data, which is due in early November. The hope is that an especially strong, or weak, number will allow investors a good idea of what the Fed is likely to do about interest rates in December.

Across the Atlantic, the European Central Bank (ECB) showed no interest in raising rates or ending its current stimulus program. Its most recent comments allowed the US dollar to rise against the Euro, which should aid European companies in exporting their products. However, inflation is still lagging in the Eurozone and recovery efforts are also hindered by the large influx of refugees. While the Mediterranean countries are staggering under this refugee crisis, the northern members of the European Union are also seeing the arrival of a large number of refugees.

Immigrants tend to benefit the economic prospects of their adopted countries, but that benefit can take years to realize. In the short-term, it is expensive to resettle and reeducate immigrants. In other news, oil finished October with a modest gain. In fact, oil saw two strong upswings during the past month. Despite the momentum that oil displays during each of these bounces, there is no indication that oil is on the verge of a recovery. Demand is still soft, especially in China, and the market is still oversupplied as production falls slowly. Until demand catches up to supply, or supply falls to meet demand, oil prices will remain depressed and volatile.

In other news, oil finished October with a modest gain. In fact, oil saw two strong upswings during the past month. Despite the momentum that oil displays during each of these bounces, there is no indication that oil is on the verge of a recovery. Demand is still soft, especially in China, and the market is still oversupplied as production falls slowly. Until demand catches up to supply, or supply falls to meet demand, oil prices will remain depressed and volatile.