To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 2.3%; the U.S. Dow jJnes Index up 2.3%; and the U.S. S&P 500 up 1.6%.
Happy New Year to everybody. Before getting to my usual weekly commentary, let me first note that it looks like Brenda and I will begin scheduling annual reviews to begin the week of January 19th. This year we will offer in-person or phone reviews. Upon request, we will still offer video reviews, but won’t make this the default option as many clients have expressed they prefer the simplicity of a phone review with a pdf review package sent by email. Again, if you prefer video, let Brenda know and we’d be happy to oblige.
It's the first week of a new month, and with it the usual “Big 3” economic releases. As has been the case the past 3 years, manufacturing continues to contract with the ISM Manufacturing Index coming in at 47.9 (readings below 50 indicate contraction). Meanwhile, “services” continue to do the opposite with the ISM reading coming in at 54.4. In fact, services reaccelerated to the upside for the month and the reading may portend growing strength in the U.S. economy. Lastly, this morning’s U.S. Employment Report came in at 50,000 new jobs created for the month of December. This last reading is underwhelming by long-term historical standards, but is in keeping with the softer 6-month trend of an essentially stagnant labor market. Encouragingly, employment did not decline for the month as it had done in 3 of the previous 7 months.
The important takeaway from the preceding economic indicators is that the U.S. economy continues to grow, albeit with pockets of concern - notably labor (while manufacturing might also be a concern, the fact is that it is small piece of the overall economy). On labor, the good news remains that the U.S. Federal Reserve has significant room to lower rates further, and is expected to do so over the course of 2026. This should provide the necessary support to allow employment, like the services sector, to re-accelerate. More importantly, these factors should continue to render recession an unlikely possibility for 2026. As all my clients will know, absent the credible threat of imminent recession, I prefer to give equities (i.e. stocks) the benefit of the doubt and manage client portfolios with an equity weighting toward the top end of the range permissible in their personal Investment Policy Statement.
Markets have now seen three consecutive years of strong returns. While I tend to think 2026 will also be a positive year for markets, I doubt it will be as strong as the previous 3 years. With stronger conviction I can assert that for 2026 to be positive for the markets, corporate earnings must continue to grow at a pace consistent with the previous three years. It’s my opinion, that growth in the stock market will largely reflect the growth rates of earnings.
Undoubtedly, there is much else going on in the world. Later today, the U.S. Supreme Court is expected to rule on the legality of President Trump’s tariff policies, and geopolitical “developments” are playing out on a number of fronts – notably Venezuela, Iran and, yep, Greenland. I’ll just say that I suspect most of these developments will prove to be mere short-term noise for the stock markets: if tariffs are ruled illegal, Trump will find other avenues to implement; Venezuela will likely fade into the background; and who knows what will happen with Greenland? However, the protests happening in Iran seem to be qualitatively different than prior uprisings and it seems to me that there is a rising possibility of regime change in the country. If this were to happen (a very big “IF”), then I do believe this might prove to be one of the rare exceptions to my oft-cited admonition to clients to “ignore geopolitical developments”. Regime change in Iran (assuming a more ‘West friendly” regime emerges) could radically reduce regional tensions in this very important part of the world. Should it happen, markets will likely react positively.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569
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