In a Quiet Week, Here is the 30,000 Foot View

Feb 14, 2020 | Nick Scholte


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As always, the number one "bogey" we are trying to avoid is recession. Absent a material worsening of the coronavirus outbreak, we don't see recession as our base case for 2020. Portfolios are positioned accordingly.

To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 1.1%; the U.S. Dow Jones Index finishing up 1.0%; and the U.S. S&P 500 finishing up 1.6%.

Frankly, outside of the continuing concern surrounding the Coronavirus outbreak, I have little to comment upon this week. As such, I will merely offer some high level summary points:

- The U.S. economy continues to chug along. Fueled by favourable policies, domestic consumption, and diversified across all manner of industries, the U.S. economy is standing out on the global stage. Typically, as goes the economy, so goes the stock market (to be sure with periodic dislocations between the two). Further confirming the strength, in an otherwise quiet week on the data front, initial jobless claims again came in at generationally superb levels.

- Looking forward, RBC anticipates US growth to be similar to that seen in 2019 – namely in the 2% range. Absent the coronavirus outbreak, I think there may have been some upside to that official expectation, mostly because the 2019 drag of trade relations with China has been materially reduced for 2020. It being a U.S. election year doesn’t hurt either.

- Of course, the coronavirus is not “absent”. Further, I still don’t think there is a full appreciation of what the real economic impact will be. Very clearly, Chinese GDP will be materially hit in the short term, and to varying degrees this hit will filter throughout the world economy. At this stage, I am viewing the outbreak through a neutral investment lens. On the plus side, it is historically the case that other epidemics have had little lasting impact upon GDP growth or investment performance. However, this outbreak appears to be more virulent than other epidemics such that the total number of cases continues to grow at an alarming rate. The rate of growth seems to suggest that the outbreak might well become a true pandemic and go global. Thankfully, the death rate appears to be quite low.

- Canada’s economy has hit a recent soft patch, and there is widespread speculation that an interest rate cut will be forthcoming in Canada. I long ago suggested this would likely occur simply because the rate differential between the U.S. and Canada was not sustainable. The higher interest rates available in Canada (vis-à-vis the U.S.) attract a greater proportion of investors’ capital to Canadian dollar denominated investments thereby pushing the value of the Canadian dollar higher. For an export centric economy such as Canada’s, a higher dollar makes the purchase of our goods more expensive driving down demand. To reiterate, I don’t view this dynamic as sustainable.

- As always, the number one “bogey” we are trying to avoid is recession. Absent recession, it is nearly always the case that equities (stocks) should be given the benefit of the doubt in investment portfolios.

- Absent a material worsening of the coronavirus outbreak, we do not anticipate a U.S. recession. As such client portfolios remain positioned very close to the long-term targets set for equity (i.e. stocks), fixed-income (i.e. bonds and equivalents) and cash. Given the ongoing strength in the U.S. economy, I’m inclined to add a modicum of overweight back to equities. I would have done so on Monday of last week with the positive manufacturing data that was reported, but the aforementioned uncertainty with respect to the coronavirus has me holding off for the time being.

And that is the 30,000 foot view. That’s all for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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