To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 2.9%; the U.S. Dow Jones Index finishing down 1.8%; and the U.S. S&P 500 finishing down 2.3%.
There is no question that economic data continues to indicate recovery. All three of the big three monthly economic indicators I track finished very solidly in expansion mode. The ISM Manufacturing Index, at a very solid 56.0, beat expectations for a reading of 54.5; the ISM Services came in roughly in line with expectations at its own solid reading of 56.9; and the monthly U.S. Employment Report also came in roughly in line with expectations at 1.37 million jobs added in August.
Yet, in spite of the good economic data, the market was firmly down for the week. In particular, technology names which led the charge to the upside since the March 23rd market bottom, likewise led the charge to the downside this week. Clients might recall that two weeks ago I sold half of our position in Apple owing to the excessively “frothy” valuations that Apple and other big tech names were attracting. In short, despite being exceptional companies deserving of their leadership positions (unlike the tech bubble of 2000 which had limited evidence of such leadership), many of these companies were simply becoming too expensive in my eyes. These companies were being priced for perfection and projecting growth rates that were simply unsustainable (in my view).
Overall, we are at an interesting point in the markets. There has been a huge run up since March 23rd. Prices in certain sectors seem excessive. We are entering the traditionally volatile period immediately after Labour Day. The Novel Coronavirus is still permeating society. School is about to go back into session. Colder weather is approaching. But a vaccine looks ever closer. In other words, there are a lot of moving parts.
At this exact juncture in time, I remain comfortable with the slightly below neutral equity (i.e. stock) weighting in place for clients. If further weakness develops next week, I may be inclined to go to a full neutral, or perhaps even slightly greater than neutral weighting. But, in spite of the better economic trends, the looming Autumn season leaves me very hesitant to go to a full overweight equity position.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
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