The rush back to “risk-on” continued during the week ending October 31 for most of the world’s stock market indices.  US indices gained from +2.7% to +4.9%, and the SmallCap Russell 2000 regained positive territory for the year to date.  The Dow and S&P 500 finished the week in record territory, after kissing “correction” territory just 2 weeks earlier.  Canada’s gains were much more muted, at just +0.5% for the week for the TSX index.  Earlier in the year, Canada’s market gains had far surpassed those in the US, but that lead has vanished and Canada is now trailing the US in year to date gains.  Developed International and Emerging International both rose by +2.8% for the week, with Japan and Brazil leading the way with gains of +7.1% and +4.0%, respectively.

The rapidity with which fear left the market in the 2nd half of October was dramatic and record-setting.  Three consecutive days of 10% declines in the VIX Volatility Index (commonly referred to as the “Fear Index”) had never been experienced before, and a total drop of 48% between the 16th and the 31st was the most rapid drop in the VIX Fear Index since March of 2009.

Fear index total drop of 48% between the Oct 16th and 31st

For the month of October, the gains in the final week of the month turned a loser into a winner for US indices and many International indices.  However, Canada and Developed International still were negative for October, with Canada turning in the worst performance at -2.3%.  The fact that gold finished the week at the lowest weekly level in 4-1/2 years did not help Canada, whose market is more sensitive to the price of gold than is any other developed nation’s market.

In US economic news, September durable goods (big-ticket items) fell -1.3%, worse than expected, and September consumption (consumer spending) unexpectedly declined -0.2% when an increase had been forecast.  All other data points reported during the week, however, were very positive.  The initial reading on third-quarter GDP came in at a better than expected +3.5% whereas economists were calling for +3.0%.  The back-to-back performance of Q2 and Q3 is the best 2-quarter result since the final six months of 2003.  The Case-Shiller home price index for August showed prices rose +5.6% year over year for the 20-city index, vs. July’s +6.7%. The slowdown in price appreciation, coupled with low mortgage rates, make housing more affordable.  In another case of “the last shall be first”, home prices rose the most in Miami, up +10.5% year-over-year, and +10.1% in Las Vegas.  Friday’s Chicago Purchasing Managers Index (“PMI”) for October was reported at 66.2, a reading that not only exceeded expectations, but was the best in 12 months.  Two very important Central Bank events also occurred during the week.  First, the Federal Reserve ended its massive bond buying programs (known as “QE1” thru “QE3”) – and the stock market shrugged it off.  The Fed’s statement remained accommodating and left in language containing the magic phrase “considerable time” in describing how long interest rates may remain near zero.  The other Central Bank gift to the market came from Japan’s Central Bank, which surprised markets with the announcement of a gigantic asset purchase plan, which will include the purchase of not only domestic Japanese but also non-Japanese equities.

Statistics Canada reported a surprise decline of -0.1% in Canadian GDP for August.  Drops in oil and gas output combined with a fall in manufacturing contributed to the first shrinkage in GDP since December.  On an annualized basis, GDP was +2.2% through August.  The Retail Council of Canada reported record-setting sales of Halloween costumes, candy and accessories.  The Retail Council maintains that Canadians now outspend the US on a per-capita basis, especially over the last three years which has seen the popularity of Halloween skyrocket in Canada.

Eurostat, the statistical arm of the European Union, reported the unemployment rate for the Euro-18 was unchanged in September at 11.8%, which is only down 0.2% from September 2013’s 12.0%, indicating basically no progress in unemployment in the past year.  Some representative numbers: France 10.5%, Italy 12.6%, Spain 24.0% and Greece 26.4%.  The youth unemployment rate remains extraordinarily high in Italy (41.8%), Spain (53.7%) and Greece (50.7%).

China’s manufacturing activity continued waning in October with the Chinese Manufacturing PMI hitting a five-month low of 50.8 in October, down -0.3 from September and -0.9 from the yearly peak of 51.7 hit in July.  Although readings above 50 indicate expansion, there’s not much of it.