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 finishing up 1.3%; and the U.S. S&P 500 finishing up 1.6%.

The “V” shaped recovery from the December 24th market low continues, although perhaps at a moderating pace. Frankly, it probably would be best for the market’s health and the sustainability of this uptrend if the pace continues to moderate for a few weeks. If forced to guess, I’d suggest that February will prove to be more of a “sideways” month as the recent sharp market gains are consolidated. The next strong leg up will probably result from any trade deal that might materialize with China (not a certainty, although I suspect it is more likely than not). To these ends, Chinese and U.S. senior officials met earlier this week and the outcome has been described – by the Chinese delegation - as “candid, specific and fruitful”. Officials will again meet in mid-February in China and, additionally, President Trump has suggested that he might personally meet with President Xi as well.

Both the U.S. monthly Employment Report and the ISM Manufacturing Index were released today. The U.S. Employment Report came in at 302,000 new jobs – beating all estimates of economists. That being said, the prior month’s blockbuster Employment Report was revised sharply lower to “just” 222,000 new jobs. Still, the average of both months remains an extremely healthy 262,000/month.

The ISM Manufacturing Index also beat expectations, coming in at 56.6 and materially strengthening from the prior month’s sharp drop which I suggested I would monitor for any continuation of “the trend”. Given today’s reading, it appears that there is no such “trend” and last month’s sharp drop was better characterized as a “blip”.

So, as has been my repeated mantra for many months now, and throughout the market correction of late 2018, no recession appears in sight and I will continue to largely “stay the course” (the qualifier “largely” was added in recognition of the 5% equity reduction I executed in October, as well as the tax loss sales I executed in December which have yet to be fully put back to work – although I am chipping away at it).

Lastly, the U.S. Federal Reserve met and released its latest policy statement on Wednesday and, as had been indicated by Chairman Powell in a pair of high profile media sessions the past month or so, rates were kept steady and not raised. In fact, the policy statement itself, as well as the accompanying press conference, revealed a U.S. Fed likely on “pause” for much, if not all, of 2019. It also revealed a Fed that is open to flexibility on the “run-off” of its balance sheet ( “quantitative tightening” if you will) by taking the very unusual step of releasing an adjunct three paragraph policy statement specific to the balance sheet topic. Quantitative tightening is essentially the reverse of the stimulative quantitative easing program that was effected for several years after the financial crisis of 2008. “Easing” reduces long-term borrowing costs, while tightening tends to raise long-term borrowing costs. The flexibility proffered on this front was welcomed by the market and should further ease any lingering recessionary concerns.

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

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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