To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.2%; the U.S. Dow Jones Index finishing up 0.9%; and the U.S. S&P 500 finishing up 0.6%.
In last week’s update I mentioned that I’d be delving into the challenges posed by ultra-low bond yields – particularly how these low rates are impacting portfolio construction in traditional “balanced portfolios”. Well, my apologies, I’ll have to defer the discussion until next week. It seems I’ve picked up a flu bug (or similar) from my children and, while I’m in the office (trying to avoid contact with my co-workers), I’m far from on top of my game. I don’t think I could have done this important topic justice. So, next week it shall be. That said, if you didn’t click on the link to the article last week, I’d encourage clients to read this recent Globe and Mail article here (it’s a direct link this week to the article, not an indirect link to my website which I know caused some confusion last time around). It’s an eye opening discussion on the very possible continued long-term decline in bond and GIC rates, and I’ve had very positive feedback (to the extent the article is eye opening… I’m not so sure clients enjoyed the implications) from a handful of clients who have read it.
Really then, I’ve but one topic to discuss this week – China trade relations. Again, given my lack of focus, the commentary will be briefer than I might otherwise be inclined to write…
So, as I mentioned in the last update, trade negotiations set for this week “may improve sentiment materially”. This appears to have transpired, as the U.S. markets have had three good days in a row, following two very poor days on Monday and Tuesday as both countries lobbed metaphorical “grenades” (among other things, such as barring U.S. pension plans from investing in certain Chinese tech companies) at each other ahead of formal discussions. As I type, the situation is fluid, and President Trump is set to meet with Chinese Vice Premier Liu He (the head of the Chinese trade delegation) just before noon Vancouver time. I suspect no material news will leak from the meeting before I send out the update. But, suffice it to say, comments from both sides have raised hopes that a “mini-deal” might be reached on a limited range of topics. There appears little hope at this juncture that a comprehensive deal will be reached. Make no mistake, a “mini deal” is likely to be nothing more than a de-escalation of rhetoric and likely not to include much of substance at this juncture. But even an easing of tone should be welcomed. As I’ve long maintained, I lean strongly to the point of view that some sort of tangible agreement (perhaps not all encompassing, but materially tangible nonetheless) will be achieved before the 2020 U.S. elections. Probably well before then. Both sides are well motivated to do so. Time will tell.
BREAKING: as I typed the preceding paragraph, in fact reports now suggest a partial trade deal has been achieved (what did I say about “fluid”?). I guess the deal was reached ahead of Trump’s meeting so that the usual pleasantries and handshakes could be exchanged.
Regarding how the improved tone in trade negotiations fit into the bigger picture, we (I and RBC) still do not see a U.S. recession as our base case scenario. Unquestionably, risks have risen the past 6 months and, at this stage, appropriately modest defensive measure have been taken. Certainly the manufacturing sector in the U.S. is a front and centre concern. So too is an inverted yield curve. But the greater majority of recessionary indicators we track have yet to confirm these concerns. Specifically, weekly jobless claims remain near 50-year lows. This is perhaps the indicator we are watching most closely as a potential harbinger of recession. It has registered no such signal (in fact, the reading ticked down – a good thing - again yesterday). Relatedly, the Canadian economy recorded its second consecutive month of stellar job growth [caveat: I rarely comment on this indicator owing to its highly volatile and largely unpredictable nature… but two consecutive monthly gains totally more than 130,000 new jobs created in an economy the size of Canada (roughly 1/10th that of the U.S.) is notable and caught my attention - I don’t believe I’ve seen such large consecutive monthly gains in my career]. As always, it is my opinion that the best path to long-term wealth creation is to ignore as best as possible the headlines of the day, and stick to the greater wealth creating power produced by a properly diversified, dividend centric portfolio of blue-chip companies held for as much of an economic expansionary cycle as possible. The disproportionately destructive effects of recession are the exception. The current economic expansion is now in its 11th year. Expansion’s don’t die of old age – some certain set of conditions kill them – usually the U.S. Federal Reserve. We have yet to see the preponderance of evidence tip the scale toward a likely recessionary outcome, and the U.S. Fed has hinted it might well lower rates again at the end of the month (in other words, the Fed is willing to play ball). Hereto, time will tell.
That’s it for this week. My apologies again, the note turned out to be longer than I anticipated – I guess I can’t help myself!
I wish clients the best, and a very Happy Thanksgiving to all.
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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