To my clients:
Announcement first: I will be away from the office next week on a short BC holiday during my children’s annual reading break from school. That said, I’ll be checking in sporadically and can be reached by email if need be. Brenda will, of course, be available to help with any urgent requests. There will be no weekly update next week.
It was an up week for North American stock markets with the Canadian TSX finishing up 2.0%; the U.S. Dow Jones Index up 1.4%; and the U.S. S&P 500 up 2.0%.
It was a very busy, and very positive, week for the economy and markets. There was plenty of good news on many fronts, so let’s get to it…
First, a highly anticipated monetary development occurred this week when the well telegraphed “taper” was formally announced by the U.S. Federal Reserve. What does this mean? Well, similar to what happened during the 2008 financial crisis, the Federal Reserve was forced to dig deeper into its tool box than the historical norm of simply lowering interest rates during times of crisis. Accordingly, after lowering interest rates to effectively zero, the Fed then initiated bond buying programs that lowered interest rates across a whole additional swath of assets. These programs have come to be known as “quantitative easing” or “asset purchase programs” and, frankly, they have proven to be powerful tools to support economies during times of difficulty. However, the Fed realizes that it can’t keep filling the proverbial punch bowl indefinitely because it will lead to other potential problems – most notably economic “bubbles”. So eventually it must withdraw the support provided by quantitative easing. This process has come to be known as “tapering” whereby the Fed methodically reduces the amount of bonds it buys on a monthly basis such that over a period of several months, it ultimately ceases to buy bonds altogether. Tapering is a sensitive time for markets and, if not communicated effectively, it can catch markets off-guard and lead to problems of its own. This is what happened in 2013 when then Fed Chairman Ben Bernanke caught markets off guard by announcing an end to its multi-year quantitative easing program in a rather abrupt manner leading to a very rapid 5% decline in stock prices at the time. That particular sell-off came to be known as “the taper tantrum”. This time however, learning from past experience, the Fed under the leadership of current Chairman Jerome Powell communicated very effectively with the markets that a taper was coming and, moreover, the tapering should be divorced from expectations for future interest rate increases. The messaging went over very well with the markets and the end result was just right – taper, but no tantrum.
And why taper now? Well, because the economy is doing exceptionally well. This week saw the release of the “Big 3” economic reports I always cite on a monthly basis and, collectively, this may have been the best set of readings on these three metrics that I’ve seen in my career. The ISM Manufacturing Index, while not at an all-time high, nonetheless came in above consensus expectations at 60.8. Any reading above 60 is historically exceptional. But the ISM Non-Manufacturing Index (i.e. “Services”) not only came in at a new all-time high, but at 66.7, blew away the previous record of 64.1. Then to add to the good news, this morning’s U.S. Employment Report showed 531,000 new jobs created in October, well ahead of expectations for “just” 450,000 new jobs. Even better, revisions added 250,000 additional jobs to the prior two months of data.
Continuing with the good economic news, I have long cited the trend in weekly jobless claims as perhaps the favourite recessionary indicator tracked by myself and RBC. It is therefore worth noting that this trend is pushing relentlessly lower, with yet another pandemic era low of 269,000 jobless claims reached this week.
And then, just this morning, Pfizer announced a new covid treatment that reduces hospitalizations and deaths by nearly 90% in those who become infected. This is a staggeringly positive result. As Dr. Scott Gottlieb, former United States Commissioner for Food and Drugs, said in the wake of the news this morning, this treatment, combined with continued vaccine distribution, puts the end of the covid pandemic in sight – suggesting January as a possible timeframe. The narrative circulating suggests that the covid “pandemic” will morph into an “endemic” phase and will be viewed as manageable and controllable moving forward.
Put it all together, and there is absolutely no recession anywhere in sight. As clients well know, if there is no credible threat of recession, then it is my and RBC’s belief that high quality equities (i.e. stocks) should be given the benefit of the doubt. Accordingly, portfolios remain overweight equities.
That’s it for this week. My next update will be November 19th. 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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