Surprise! October has been a great month for the stock market, and not just the U.S. This has been a global rally:
Global markets in October
S&P 500 up 6.9%
Germany up 8.6%
China up 10.3%
Japan up 6.0%
Once again, the Street has been surprised. What's behind the October rally?
1) Lower probability of Fed hike. This is the most important factor. The current rally began on October 2nd, the day of the disappointing September nonfarm jobs report. That is also the day the CBOE Volatility Index began its most recent slide, going from roughly 21 to below 15 today.
2) ECB, China, Japan central banks more dovish. The rally continued this morning, when Europe and U.S. futures popped on the ECB's Mario Draghi dovish commentary. Much of the China rally has been attributed to a belief that the People's Bank of China would enact more stimulus, particularly after the 6.9 percent print of third quarter GDP.
3) Revenue declines: strong dollar gets much of the blame. I've made a lot of what I call the "revenue recession" that has been developing this year. If current estimates hold up, we are facing four consecutive quarters of negative revenue growth:
Revenue recession (S&P 500)
Q1: down 2.9%
Q2: down 3.4%
Q3 (est): down 3.4%
Q4 (est) down 1.9%
However, this quarter companies have become increasingly vocal about the impact the strong dollar is having on their bottom line. They are not exactly asking for a "pass," but they are asking for some understanding, and I am seeing signs that some investors are indeed listening.
This morning, for example, 3M noted that sales declined 5.2 percent year-over-year, but then noted that the strong dollar reduced sales by 7.4 percent year-on-year. In other words, the revenue decline was mostly attributable to currency.
There is some truth to this, but no one should be fooled into thinking that a strong dollar is the primary source of our revenue worries.
We are facing lower demand due to slow—and in some cases declining—global growth.
You can see this in Caterpillar's report today. They too missed on revenues. Sales were down 19 percent, but management specifically said it was due mostly due to lower volume in Latin America, Europe, and Asia, though they did note that negative currency impact was roughly 3.5 percent.
So negative currency was a significant, but not the primary factor, for Caterpillar's revenue decline.
This is an old story, of course, and at times when the dollar is weak this same phenomenon works to the advantage of revenues.