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 0.7%; and the U.S. S&P 500 finishing up 0.6%.
Economic data continues to confirm a strong recovery. With respect to the “Big 3” indicators, the monthly ISM Manufacturing Index came in at 61.2, just shy of the highest reading over the past decade – bested only by the reading two months ago in April; the ISM Non-Manufacturing Index (aka “Services”) at 64.0 came in at a new all-time high for this metric; and May employment figures showed a very robust 559,000 new jobs created for the month.
Regarding weekly jobless claims, as I anticipated in last week’s update, this metric did in fact dip below 400,000 for the first time since the pandemic began. Weekly claims with a “3” as the first digit might fairly be described as entering a historically normal range. Further, as I’ve often noted, though a secondary economic indicator in comparison to the Big 3 cited above, the trend in weekly jobless claims nonetheless has been identified by RBC as one of our firm’s preferred leading indicators for recession. The trend is absolutely moving in the right direction.
Frankly, there are only two realistic threats to the recovery in the foreseeable future: 1) the emergence of a vaccine immune Covid variant; and 2) runaway inflation.
Regarding covid variants, the Indian “delta” variant continues to cause concern and was identified in a care home outbreak here in BC this week. This variant seems to be more transmissible and causes more severe outcomes. However, vaccines appear to be effective against the variant if both doses are taken – less so with just a single dose administered. While of concern, the delta variant does not appear to be the feared game changer given ever-expanding vaccination rates. That said, a new variant could still emerge, so attention must continue to be paid to developments on the covid front.
Regarding inflation, I’ve written recently on this topic. I’ll merely reiterate that my and RBC’s view aligns with that of the Fed – that inflation pressures are likely to be “transitory”. That said, given the vast amounts of stimulus pumped into the global economy, my conviction on this outlook is anything but certain. Here too attention must be paid.
Bottom line: absent the emergence of a vaccine immune Covid variant or inflation data forcing me and RBC to reconsider our outlook, recession is NOT a concern at the present time. Under such conditions, equities (i.e. stocks) should be given the benefit of the doubt. Accordingly, client portfolios are presently overweight equities.
That’s it for this week. All the best and remain safe,
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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