To my clients:

It was a down week for North American stock markets, with the Canadian TSX finishing down 2.3%; the U.S. Dow Jones Index down 0.9%; and the U.S. S&P 500 down 1.2%.

There’s lots to cover this week, so I’ll try to keep it brief on each topic…

Starting with the new Omicron covid variant, while anecdotal indications of its characteristics are emerging, there is nothing definitive as yet. On the negative side, preliminary data appears to suggest it is more infectious than previous variants. On the positive side, the severity of illness does not appear to be worse than other variants, and may actually have better average outcomes. I reiterate, these remain anecdotal signs at this stage. Also pending is to what degree vaccines remain effective. On this last point, vaccine producers expect to have answers in the next week. I’d expect we will also have better data on the first two concerns in the next week as well.

So it’s too soon to make declarative statements with respect to Omicron and what the necessary public policy response will be. As such, it’s also too early to make any further moves – defensive or otherwise – in investment portfolios. At this stage I remain comfortable with the modest reduction in equity exposure I took in client portfolios last Friday. If a better case scenario emerges (i.e. that vaccines remain largely effective and that severity of illness is no worse, and perhaps better, than previous variants), then the cash raised will be reinvested. If data emerges that a worse case scenario might play out, then perhaps further defensive measures might be taken. However, I do not envision drastic defensive measures similar to February 2020 when covid was first shown to transmit asymptomatically and the WHO declared a pandemic. The world now is simply in a much better place to deal with renewed pandemic threats than it was then.

Interestingly, I’m not convinced that the majority of this week’s volatility and weakness can be attributed to Omicron. Some of it surely is, but I suspect the lion’s share of market turbulence this week derives from comments made by U.S. Federal Reserve Chair Jerome Powell. In testimony before Congress on Tuesday, Powell suggested that it is time to retire the word “transitory” when it comes to inflation expectations and, further, it would be appropriate to discuss the acceleration of the wind up of the Fed’s asset purchase program (aka: quantitative easing) when the committee next meets in mid-December. This was a surprise to the markets and, as is my habit, I was watching the intraday chart of the Dow Jones Index while Mr. Powell was testifying, and it plunged from what had, until then, been a positive day at the time of his comments to a decidedly negative day thereafter. Much the same scenario played out when Mr. Powel reaffirmed his comments in his second day of testimony on Wednesday. In other words, the market is having a “taper tantrum”. However, much like the market quickly recovered when then Chairman Ben Bernanke first triggered a taper tantrum in the aftermath of the 2008 financial crisis, I expect a similar reaction this time (Omicron notwithstanding).

Why do I think so? Because the taper is, in large part, being inspired by an economy that remains very strong. The Big 3 economic data releases came this week, and ISM Manufacturing came in at an exceptionally strong 60+ reading, while the Services Index followed last month’s all-time record high with another newer high this month at 69.1. Admittedly the monthly Employment Report was modestly disappointing in that only 210,000 new jobs were created as opposed to expectations for 550,000. But even there, the underlying details were not as bad as the headline suggested. Without elaborating too much on those details, suffice it to say that the unemployment rate moved to yet another post-pandemic low of 4.2%, and is now approaching the range seen pre-pandemic.

Bottom line: it was a volatile and down week with a number of market moving headlines - but the economy remains strong. Even if data emerges that the Omicron variant might be worse than hoped, unless it proves to be a near worst-case scenario I don’t imagine my pro-equity philosophy will shift materially. But vigilance is being paid.

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

Nick

Nick Scholte, CIM, FCSI

Senior 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
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

Visit Our Website: www.nickscholte.ca

We accept new clients primarily by referral from our existing clients. If you have family or friends who would be a good fit for our specialized wealth management services, please let us know.

Any recommendations herein are for the exclusive use of clients of RBC Dominion Securities and Investment Advisor Nick Scholte. Any other direct or indirect recipient of this email should consult with his/her own licensed investment advisor prior to implementing any investment action he/she may be contemplating.