To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 1.0%; the U.S. Dow Jones Index finishing up 1.2%; and the U.S. S&P 500 finishing up 1.7%.
Last weekend the much anticipated G20 Summit meeting between President Trump and President Xi finally took place, and a temporary truce was the result. Specifically, no further sanctions will be forthcoming in the immediate term, and both sides agreed to return to negotiations. Thereafter, President Trump engaged in a hastily arranged rendezvous with North Korean leader Kim Jong-Un at the demilitarized zone separating North and South Korea, with President Trump actually taking a handful of steps into North Korean territory. Readers will well know that I am no fan of President Trump, but my personal opinion is that such an off-the-cuff engagement of Kim was actually a positive step likely to further engage the North Korean leader in additional disarmament talks. Reading the press coverage of the event, it would seem I am in a minority with this opinion, with the more popular narrative being that Trump undermined long-standing foreign policy efforts with respect to North Korea.
Regardless of whether Trump’s foray into North Korea helped or harmed further progress with the North, the markets keenly received the Chinese developments, opening strongly on Monday and largely retaining that strength through the holiday shortened week. The caveat to this statement is that the markets were slightly weaker today on stronger than expected economic news. Specifically, the monthly U.S. Employment Report was released, and it revealed that 224,000 new jobs were added in June, well ahead of expectations for 160,000 new jobs and vastly better than last month’s 72,000 reading. Of course, this begs the question: why would markets dip on strong economic news such as this?
The answer lies in the fact that given recent messaging from the U.S. Federal Reserve, markets were ascribing a high likelihood to an end of month rate cut by the Fed, perhaps as large as 0.50%. Further, market watchers were even beginning to coalesce around the narrative that a “best case” scenario might be unfolding whereby the Chinese trade situation improved, but not too much, such that the Fed still felt the need to cut rates at the end of the month and, once they did so, only THEN was a trade agreement reached. Alternatively, a less appealing outcome – as this narrative goes – would have been some surprise trade deal announcement with the Chinese at the G20 Summit, which although absolutely positive economically, almost for sure would have taken a rate cut completely out of the picture at the end of the month. Today’s employment report probably falls somewhere in between – a positive economic development which, on its own, lessens the likelihood of a rate cut of 0.50%, but may still leave the door open to a 0.25% cut. In any event, today’s developments are reminiscent of the heyday of quantitative easing, when good economic news often led to negative market reaction insofar as the hopes of further stimulus are lessened.
Other economic news for the week saw the monthly ISM Manufacturing report slightly beat expectations at 51.7, while the non-manufacturing index missed expectations at 55.1. Combined, these two reports are decidedly softer than the trend of the past two years, and would have done little to dissuade the Fed from cutting rates at the end of the month – if, indeed, that is the Feds plan.
In sum, I find my and RBC’s line of thinking to be very similar to that of the Fed – that the economy remains generally in decent shape as it works through this soft patch, and perhaps an “insurance” cut or two (or three) would serve well to prolong the economic expansion by another handful of years. We still do not see any immediate or credible threat of recession, so my positioning for clients remains largely as it has since I last lowered equity weightings in the Spring – slightly overweight the long-term equity target as specified in each client’s own unique Investment Policy Statement.
That’s it for this week. All the best,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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