Soft Data Continues

Oct 04, 2019 | Nick Scholte


But recession still is NOT our base case

To my clients:

It was a down week for North American stock markets with the Canadian TSX falling 1.5%; the U.S. Dow Jones Index falling 0.9%; and the S&P 500 falling 0.3%.

It’s the first week of a new month and, as usual, the big three monthly economic indicators are on tap. That being said, after a handful of heavier than usual updates the past several weeks, I’ll keep my economic and market-related comments brief this go around. Next week I do want to spend a bit of time examining how the predicament of “low” interest rates (and what, exactly, a “low” rate might be) is upending asset allocation decisions in traditional 60/40 balanced portfolios. For those who might like a preview, I’ve linked an October 3rd Globe and Mail article in the “Topical Links” section of my website that covers one aspect of the dilemma – namely the likely persistence of ultra-low rates for the generation to come (see here).

The major market moving news this week was the second consecutive contractionary reading in the ISM Manufacturing Index. At 47.8, the September reading was firmly planted in contractionary territory and is, undoubtedly, a worrying signal. Should the indicator continue to slip, it may yet lead to a decision to further reduce risk in portfolios. As a reminder, client portfolios are presently positioned very slightly above the long term equity targets identified in each client’s individual investment policy statement. This after several years of maintaining portfolios near the upper equity bound.

The ISM Services Index, coming in at 52.6, also disappointed in relation to the expected 55.0 reading. Nonetheless, it remains expansionary. Of further comfort is the knowledge that the “services” sector is a far larger segment (in fact, many multiples larger) of the U.S. economy than is the “manufacturing” sector. But the slowdown is noteworthy and should be monitored.

It’s worth noting that the above two data points, while widely followed and undoubtedly important, represent “sentiment” indicators. This morning, the monthly U.S. Employment report - the single most important “hard data” indicator - was released, and at 136,000 new jobs created, it approximately hit expectations. Moreover, the unemployment rate hit a 50-year low at 3.5%. While a slowdown from the 200,000+ rate of monthly job creation seen in recent years past, today’s reported rate is still decent and indicative of a healthy labour market.

Overall, economic data is soft, and consistent with a slowdown. However, we (I and RBC) still do not see the data suggesting a recessionary base case. Slowing – yes. Recession – no. Not yet anyway. Next week’s trade discussions between China and the U.S. may improve sentiment materially. Further, it looks as though the U.S. Federal Reserve will likely be lowering rates again at the end of October. This too should provide support for the economy and the markets.

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


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

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