The last 3 week rally could make October the strongest month for US equities of the year, so let’s forget the economic facts for a moment and pause to toast market irrationality.

Life would be easy for economists if people and markets were rational. Economists study data, and with the collection of facts make rational projections for the future based on data. Economics is a very common sense science but in this crazy, messed up world where bad is good and good is bad, the science of economics is thrown out of the window. As the market throws common sense out of the equation, we are left with emotions such as fear, hope, and greed driving markets. Wouldn’t it be nice if we lived in that magical common sense dream world where good is good, and bad is bad?

Last week we continued to pile onto the global rally that has added over $4 TRILLION in value to world equities this month. A slew of weak economic reports has pushed back the expectations of a US FED rate hike in 2015 which has fueled the rally. US commercial banks concerned over continued low yields have increased their Treasure holdings to a record $2.15 trillion, translating to a stake almost double the amount owned by China, the biggest U.S. foreign creditor. According to futures data, the probability of a FED increase in rates by the end of the year has now dropped to 30% from 70% odds at the beginning of August.

So, let’s dissect this October rally. Many investors went to cash prior to October for the very reasons of the true data we have been discussing. Across the board the market was beat down at the end of the August and into September, and with the rally it can now be said that the equity dip was an over-correction. With many investors and traders on the sidelines, low volume has allowed the markets to rebound and is slowly bringing investors back into the market.

Banks have performed surprisingly well considering the low rate environment, and many large cap companies have been able to control earnings from cost reductions. From early 3rd quarter earnings calls we are getting some good earnings reports from firms with little global exposure, more stock buyback plans, and some key takeaways from the misses.

The number one private consumer of labor in the world is Wal-Mart. Wal-Mart only lacks wearing the world labor king to the US Department of Defense and the Chinese Army! On Wednesday Wal-Mart suffered the biggest single day stock price drop in 15 years as the company announced flat revenue and possible future earnings declines. The stock is now down over 30% for the year, but it took a one day drop of 10% to get the media to take notice.

Wal-Mart is a direct reflection of America, from both a supply and demand point of view. Like America, Wal-Mart has a two-part problem: falling demand (i.e. less consumer consumption), and the thirst for labor. The bright spot of our American economic data has been employment. Though we did not hit the job creation target at the last job report, the sector is still improving as the unemployment rate is now hovering at the low 5% range. The concern from the FED has been wage growth (specifically the lack there of) and Wal-Mart is working hard to provide wage growth. However, Wal-Mart’s stock has been beaten down as investors want profits right now AND in the future and this is very difficult to do when demand is down and expenses are increased.

We have discussed how the FED is backed into the corner and no matter what they do with rates the market will not be happy. Wal-Mart has shown us the same level of market irrationalness. It is not just the FED that is backed in the corner, but also corporations like Wal-Mart. Economists would love to find a way for people to have their cake, and eat it too, but that tends to be a bit tricky. Things that we do now have future consequences, whether it be the FED continuing with prolonged low interest rates, or Wal-Mart investing in infrastructure and wage growth.

So while Brazil, the world’s seventh economy has their credit turned to junk status and India’s import and export levels are 25% below last year, let’s forget about it and cheer on the bull market. So here is to low rates, the hope of more central bank stimulus, cheap commodities, stock buybacks, and growing corporate profits today AND tomorrow!

As long as people are not rational, you can forget any usefulness coming from economists until the markets wake up and see the real facts.

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