It's a typical rally for a bank-sparked recession

David Parkinson

Last updated on Monday, Oct. 05, 2009 06:32AM EDT

If the stock market rally seems so wildly out of line with that of normal recoveries, maybe we should stop comparing it with normal recessions.

Last week, when the S&P 500 peaked at 60 per cent above its March lows (and the S&P/TSX composite index was up 55 per cent from its March bottom), Gluskin Sheff + Associates Inc. chief economist and strategist David Rosenberg pointed out that in typical recessionary bear markets, stocks don't see those kinds of recoveries until the economy has expanded by more than 5 per cent (it has only recently turned upward), U.S. employment has risen by more than two million jobs (it is still declining) and corporate profits have climbed 34 per cent (they, too, are only just turning positive).

His conclusion: This rally has far outpaced where it normally should be at this stage of the economic recovery.

But as Mr. Rosenberg and others have been keen to point out for months, this has not been a typical recession. When you compare it with other similarly unusual downturns – namely, those triggered by banking crises – both the depth of the selloff and the speed of the recovery don't look so unusual at all.

Normally abnormal
In a research report this week, National Bank Financial market strategist Pierre Lapointe took a look at the six downturns over the past 30 years that the International Monetary Fund has identified as triggered by “periods of banking-related financial stress” – in other words, the six economic events around the world that most closely resemble the financial meltdown of last fall.

Signs of recovery energize resource and metal funds

REUTERS

Both gain an average of nearly 11 per cent, but managers say more positive data are needed if rally is to last

Natural resource and precious metals funds generated robust returns in September as commodity prices rose on signs of a global economic recovery.

Resource and precious metals funds both gained an average of nearly 11 per cent last month, and were among the best performers year to date, according to preliminary data released Thursday by Globe Investor.

Economically sensitive stocks have rallied because there is data confirming a rebound, said Benoît Gervais, a fund manager with Mackenzie Financial Corp., adding that there is a synchronized recovery between developed and emerging markets.

But there could be a pullback in the resource sector if there are any signs that the recovery has stalled, he cautioned in an interview.

“You need constant flow of information to confirm that the economic recovery is on, so that people have higher confidence that those stocks will make money.”

The resource sector is “like a garden, where you have flowers for all seasons,” said Mr. Gervais, who co-manages the Mackenzie Universal Canadian Resource and Mackenzie Universal World Resource funds.

Base metal and gold stocks started doing well late last fall, but energy stocks – particularly natural gas – have blossomed in September, he said.

Mr. Gervais said his funds are now overweight in the energy sector, and he sees more upside for natural gas stocks as its commodity price rises enough to allow new shale gas players to “generate significant return on capital.”