To my clients:

It was a down week for North American stock markets with the Canadian TSX falling 4.5%; the U.S. Dow Jones Index falling 6.9%; and the U.S. S&P 500 falling 7.0%.

I struggled with what to write this week – not because of a lack of conviction in my or RBC’s messaging, but rather because of the growing media focus on negative headlines, such as: government shutdowns; China trade tensions; flattening yield curves; a Federal Reserve asleep at the wheel etc. etc. To temper (not necessarily dismiss) these negative headlines, I feel I could write one of my longest weekly updates ever, which I’m sure no one would like to see (some of my updates coming out of the 2008 financial crisis were pretty darn long!). In any event, I’m opting for a brief and to the point take on the current market environment supplemented by an official RBC strategy piece produced earlier this week.

Let’s be frank – this week sucked. So too has the month of December. So too has this entire two month stretch. Markets are very solidly in correction mode, and beginning to knock on the door of “bear market” territory (in this case defined as markets that decline 20% or more from a recent peak). But, it should be pointed out, that bear markets – absent an accompanying recession – are very rare indeed, usually short lived, and significantly shallower than those that coincide with recession. And on the topic of recession, many very smart minds do not believe one is looming. The strategists at RBC do not think so. The strategists at PIMCO (the world’s largest bond fund managers) do not think so. The Chairman of the Council of Economic Advisors does not think so. The entire board of the U.S. Federal Reserve does not think so. All of these entities forecast U.S. growth for next year at between 2.5% and 3.0% (for what it is worth, RBC’s forecast is the lowest at 2.5%). Such a rate of expansion is greater than the post 2008 average. It only represents a slowdown when compared to the tax-cut fueled expansion rates seen this year in 2018. Markets simply got ahead of themselves and are having to recalibrate profit expectations for 2019 and beyond (unfortunately, this “recalibration” is being further fueled by the dark headlines noted in my opening paragraph).

In other words, this remains in my and RBC’s view a VERY uncomfortable correction. But, to add a bit of context, there have been two other corrections of similar magnitude since 2008. Using the Dow Jones Index as the measuring stick, the market declined by 18.9% in the late summer of 2011, and by 16.2% through the middle of 2015. The Dow Jones Index is now more than 70% and 20% higher than the levels seen when each of those corrections respectively began.

Again, I could quite easily write several pages on many of the sub-topics fueling the current market angst. A big part of me wants to because I think long-time clients and readers will know that I find this kind of stuff interesting – despite the induced anxiety that accompanies the intellectual interest. But for the sake of focus, I will not. I’ll simply reiterate that we believe this episode will pass. I’d encourage clients to read the attached RBC strategy piece titled “Coping with the Correction”. The piece is just two pages of text (followed by the usual number of pages of disclaimers) and written in a reasonably straightforward manner.

That’s it for this week. Owing to the holiday period, I don’t intend to write an update next week unless circumstances require it. Given the volatility of late, that may well be the case.

For those that celebrate, I wish you and your families a very Merry Christmas. For those that don’t, Happy Holidays and a Happy New Year!

Nick

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
Toll Free: 1.844.665.9900 │ nick.scholte@rbc.com

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