To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 0.9%; the U.S. Dow Jones Index up 0.1%; and the U.S. S&P 500 up 0.2%.

It’s the first week of a new month and, with it, the Big 3 economic releases… BUT, lets first turn our attention to two other topical matters – the Middle East and, briefly, the U.S. port strike.

Obviously, the conflict in the Middle East has reached a high boil. While the metaphorical pot has yet to boil over, the potential certainly exists. But here I’d make a handful of observations:

    1) the Iranian missile launch toward Israel was pre-announced. This says to me that Iran was not prepared to instigate an open war with Israel because, if they were, then strategic surprise would have been a paramount consideration;

    2) to the extent the missile launch was intended to inflict harm upon Israel, this intent was rendered impotent as Israeli missile defenses shot down and destroyed all inbound munitions (just as they did in a similar launch earlier this year); and

    3) Saudi Arabia, the other major player in the region, seems to have no desire for an all-out Middle Eastern conflict. Prior to tensions erupting one year ago, Saudi was a key promoter of a regional peace deal with Israel.

To the preceding, I’d also note that in spite of the humanitarian toll (which is horrid), regional conflicts simply don’t have much lasting impact on global trade and North American markets. Yes, there can be short-term market reactions but, again, these don’t last. I’d encourage clients to not let their humanitarian sympathies translate into concern for the health of their portfolios.

To the U.S port strike, were it not for this morning’s preliminary agreement putting an end to the strike, this issue would have had a more prominent place in this week’s update. All I’ll say is that operating ports are integral to the healthy functioning of the North American economy. When ports don’t operate, scarcity of goods rises and inflation results. Ports are the gateway to the supply chain, and we all know the inflationary impact that disrupted supply chains had post-covid. I’ll dwell on the topic no longer (now or in the future) unless this morning’s resolution is somehow not ratified.

Now, to the Big 3 economic releases. At a reading of 47.2, the ISM Manufacturing Index continued to contract (all readings below 50.0 indicate contraction), just as it has for all but one month of the past two years. Yes, this metric is disappointing, but offsetting this manufacturing weakness is a services sector that re-accelerated to the upside with a reading of 54.9 (vs the prior month reading of 51.5). This is especially notable since the services sector accounts for roughly 75% of U.S. economic activity and dwarfs the contributions of manufacturing.

But, most important of all is the monthly U.S. Employment Report. And here the news was fantastic. Blowing past even the most optimistic expectation (said “most optimistic” expectation being 220,000) of individual economist’s projections, the U.S reported 254,000 new jobs were added in September. Such a rosy result was hinted at by weekly jobless claims which, over the past month, had generally retreated from their late summer highs.

Collectively, these Big 3 economic releases paint a robust picture of U.S. economic health. In these weekly missives I’ve often discussed the relative probability of a mild recession vs an economic “soft landing” (i.e. economic output slows, but does not result in recession). One possibility that, to date, I’ve not discussed is the idea of “no landing” – in other words, the economy doesn’t slow in any meaningful way at all but, rather, continues a healthy expansion. Owing to the lagged effects of the massive increase in interest rates the prior two years, I’d be hesitant to support this view. BUT, I’ll also admit that the covid-inspired societal lockdowns were an artificial construct that disrupted economic activity in unprecedented ways and it may be the case that traditional economic indicators (and the expectations they inspire) simply might not work this time around. So, while I remain in the camp expecting a “soft landing”, I am growing more open to the idea that “no landing” might also emerge as a possibility. As always, I’ll be watching and monitoring with interest, and act as necessary.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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