To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.2%; the U.S. Dow Jones Index down 0.1%; and the U.S. S&P 500 up 0.1%.
This week’s update will consist of “quick hits” on a variety of topics:
- In recent weeks, markets have recovered substantially from their lows, although are still down year-to-date. Watching CNBC yesterday (something I do NOT recommend clients do), a commentator made an analogy that I think is very apropos to the current environment. He said that the “map” from here to year-end looks likely to be a positive one for equities (i.e. stocks), but that sadly the “map” doesn’t show the “terrain” along the way. Among other things, the terrain might include hills both up and down as well as a boggy marsh or two. In other words, despite the positive destination shown on the map, the terrain along the way is likely to be bumpy. I thought this was a good visual that maybe clients can relate to.
-On the economic front, the U.S. created a very healthy 431,000 new jobs in March, and with positive revisions made to January and February data, is averaging over 500,000 new jobs per month through the first quarter of 2022. These are near historically strong levels. Further, the ISM Manufacturing Index at 57.1 remains at solidly expansionary levels although, admittedly, it missed expectations of 59.0. Nonetheless, the economy remains very strong.
- Capturing many headlines this week was the mild inversion of the 2 to 10-year yield curve. While this was a noteworthy development, we here at RBC prefer to focus on the 1 to 10-year curve which remains substantially positively sloped. Further, the even wider 30-day to 10-year curve is contained in the Leading Economic Indicator index, and this portion of the curve is even more positively sloped. I won’t get into the details of what this all means here in today’s note other than to say that yield-curve inversion has a well-documented history of portending recession, but the focus being given the 2 to 10-year inversion is overdone in our opinion. At the very least, we’d discount the signal unless it persisted and widened to perhaps 0.5% or more (as opposed to the tiny fractions of 1% it inverted this week). I’d add also that as the Federal Reserve begins selling off bonds it previously purchased as part of its covid-fueled quantitative easing program, this will likely force up longer-term interest rates and help re-steepen yield curves.
- All seven of the indicators (including the 1 to 10-year yield curve) in RBC’s Economic Scorecard remain flashing green. We do not believe recession is imminent, at least not in 2022. Client portfolios remain overweight equities.
- Client holdings in Stryker were sold this week as it hit the RBC target price of ~ USD $272. Proceeds were redistributed into Home Depot which is trading at a 52 week low and is well below RBC’s target price. Some (not all) clients also held AT&T. This too was sold as a recent dividend cut removed one of the primary attractions of the investment.
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
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