The U.S. and China Officially Sign a Phase 1 Trade Deal, While Regional Manufacturing Data Provides Hope for a Marked Improvement in the National Survey Next Month

Jan 17, 2020 | Nick Scholte


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All considered, the decision to add back some equity to client portfolios is looking ever more imminent.

To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 1.9%; the U.S. Dow Jones Index finishing up 1.8%; and the U.S. S&P 500 finishing up 2.0%.

It’s a reasonably brief update this week…

In a week that saw the U.S. and China officially sign a “Phase 1” trade deal on Wednesday, equity markets enjoyed a solid 5-day stretch as evidenced by the statistics in my customary opening line above. While the deal – in and of itself – didn’t likely fuel the rise in investment markets, it’s also the case that a key overhang for the markets has been meaningfully reduced (though not eliminated – Phase 2, and possibly 3, are yet to come). Interestingly, Eric Lascelles, Chief Economist for RBC Global Asset Management, released his monthly report yesterday and it was notable - to me at least - for a marked shift toward more positive economic developments and a reduced emphasis on negative developments. Of particular interest to me was the lowering risk of recession in 2020.

Mr. Lascelles’ economic work is focused mainly on the “super-macro” (my term - intended to convey the very top-down perspective of his reports). He tends not to get into the trends in specific economic indicators when compiling his monthly outlook, although I know without a doubt that all such indicators (including those that I regularly comment upon as well as many, many more) form part of his research. So, while Mr. Lascelles super-macro perspective has encouragingly turned more positive, it’s interesting to further observe that one of the key-recessionary indicators that I/we track (in fact, the 2nd most important indicator we track at Dominion Securities) is the trend in weekly jobless claims. It has again turned lower (and lower is better with this metric). Readers might recall that there was a notable spike up in early December to a reading of 252,000 claims for the week. I made note of the spike at the time and suggested that the move higher, if sustained, would be cause for concern. But I also suggested that the move higher might well have been tied to the timing of the U.S. Thanksgiving holiday, and that the reading for the report might be expected to decline in the subsequent weeks. In fact, this has occurred. This week’s reading, at 204,000 new claims, is again on the threshold of dipping below 200,000. Such low readings represent multi-generational lows. This particular metric is again flashing the “all clear” signal.

Really, the only obstacle at this juncture preventing me from adding back some equity to client portfolios is the state and outlook for the manufacturing sector. Hereto, I’m shading ever more optimistic in my outlook. To wit, this week two of the more important regional surveys (New York and Philadelphia) that I sometimes cite both indicated expansion and beat expectations. The Philadelphia survey was particularly strong. I’d be surprised if next month’s ISM survey of the manufacturing conditions across the nation didn’t show material improvement also.

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

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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