September: Global equities are on track for a ninth straight quarter of gains

Highlights

• Two-thirds of the way through Q3, global equities are on track for a ninth straight quarter of gains, the longest such run since 1995-96. The MSCI All Country World index has been posting record highs. Emerging markets, cause for concern early in the year, have been doing especially well since midyear.

• With the S&P 500 at an all-time high, a growing number of investors are concerned about index fatigue. We find it difficult to buy into this argument that a correction is coming. The rise of the S&P 500 has certainly been impressive in recent quarters, but so has the performance of the economy. Moreover, strong growth in leading indicators is very good news because it implies that monetary policy is finally gaining traction in the real economy. This development is confirmed by increased lending at U.S. commercial banks, where loans and leases have grown notably in recent months.

• An improving North American economic backdrop can go only so far to support equity markets if the rest of the world deteriorates. In the euro area, the good news is that the central bank has pledged to use unconventional monetary policy to fight deflationary forces. Though the direct effect of new liquidity injections on the real economy may not be immediate, the central bank is moving in the right direction. In the emerging world, we take comfort from China’s low CPI which should allow policymakers to ease the grip of their monetary and fiscal tightening.

• At this juncture we remain comfortable with our recommendation to overweight equities relative to our benchmark while maintaining a slight underweight for fixed income products. Our year-end targets are raised to 16,200 for the S&P/TSX (from 15,700) and to 2,085 for the S&P 500 (from 2,010).

• We are altering our global equity allocation this month. We are increasing our S&P 500 exposure at the expense of the S&P/TSX, which is reduced from overweight to market weight. We are also making changes to our sector allocation this month. Energy is downgraded to market weight while Financials are moved from market weight to overweight. We are also downgrading gold stocks back to market weight.