Statistically, September is tough on stocks. But very little is normal about the economy these days and as investors return from Labour Day there is more positive sentiment in the market than there has been all summer.
Over the past 60 years, U.S. markets have performed their worst in September, averaging a decline of about 1 per cent, according to the Stock Trader's Almanac. But the first three trading sessions alone this September have sent major indexes up 1.7 per cent in Toronto and about 4 per cent in New York, following a disastrous month of trading in August.
Talk of a double-dip recession is suddenly starting to wane after a burst of better-than-expected economic reports last week.
U.S. data pointed to some improvement in private sector employment, manufacturing, retail sales and existing-home sales. There were shortcomings and inconsistencies in the numbers for economists to pick through, but even notorious bears acknowledged a ray of hope in the data.
"Dodging a bullet, yes; out of the woods, no," is how David Rosenberg, chief economist and strategist at the wealth management firm Gluskin Sheff + Associates Inc. summed up the situation.
The bond market tells an interesting story about this recovery. On the one hand, the gap between short-term and long-term T-bills has increased to 2.19 per cent as investors demand higher returns for putting their money into 10-year bonds. The yield on 10-year Treasuries increased almost one-quarter of a percentage point in the first three trading days of the month. Market watchers normally consider steep yield curves a sign that the economy will improve.
On the other hand, investors' strong appetite for both corporate and government bonds these days speaks to a lingering element of fear. The iShares DEX All Government Bond Index Fund has gained more than 4 per cent since April, when the selloff in stocks began, and the iShares DEX All Corporate Bond Index Fund is up 3.5 per cent.
The volume of trading on North American exchanges is still light relative to historical levels and many technical analysts say a rally won't be sustainable without more cash and more participation.
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THE WEEK AHEAD
This will be a light week for fresh economic news. On Wednesday morning, the Bank of Canada is scheduled to announce its latest policy on interest rates. Economists say it's tough to call which way the central bank will move given the mixed reports on the domestic and global economy.
David Tulk, senior macro strategist at TD Securities Inc., expects the central bank to increase its key overnight lending rate by one-quarter of a per cent to 1 per cent - the third successive increase and likely the last of the year.
"An overnight rate of 1 per cent effectively balances the diminished need for an emergency policy setting with a sufficiently accommodative stance to hedge the very real downside risk to global growth," he noted.
Canada has begun the first moves to tighten monetary policy ahead of the U.S., Britain and the European Union and any hike on Wednesday could give a lift to the Canadian dollar. Analysts and investors will also be paying close attention to the bank's outlook statement.
From the U.S., July trade figures due to be released on Thursday will be another key piece of data for the markets. Expectations are for a decrease in the trade deficit, which hit a massive $50-billion (U.S.) in June, impairing economic growth.
The White House could also influence markets, with President Barack Obama promising to address new ways to boost economic growth and employment.