Good morning. Yesterday we said there could be an investment case for Chinese equities, if the Chinese government used its fiscal muscle to revive the economy. Just an hour after our letter came out, Xi Jinping and his team announced that there will, indeed, be fiscal stimulus. Chinese stock indices jumped on the news. We are not yet convinced. Few hard targets or policies were announced, and it will take a lot of fiscal support to avoid a deflationary trap. Will China put its money where its mouth is? Email us: [email protected] and [email protected].   

A slightly weird rally

The S&P 500 hit another all-time high yesterday. The market has been rising steadily, if not spectacularly, since September 6. That was the day of the August jobs report. That report goes quite a long way — though not all the way — to explaining the buoyant market. The report was hardly terrible; the unemployment rate fell from the month before. But it was weak enough to open the door to the jumbo-sized 50bp cut that followed on September 18. This is, on first glance, a soft landing rally. 

The market has not just risen over the past three weeks. Its structure has changed completely. The sectors that led the market for the three months before the jobs report are now the laggards. Through the summer, plays on falling rates (real estate, financials and utilities) and defensives (consumer staples and healthcare) were the place to be. Tech lagged. This month the opposite has been true. Tech is back with a vengeance and cyclicals (materials and industrials) are booming too. The only constant between the two periods was poor returns from energy companies, as soft global demand has kept the oil price low.