To my clients:

It was an modestly down week for North American stock markets with the Canadian TSX falling 0.6%; the U.S. Dow Jones Index falling 0.2%; and the U.S. S&P 500 down 0.2% .

Despite the modest losses, the volatility of the week was extraordinary. The markets saw huge gains on Wednesday in the immediate wake of Federal Reserve Chairman Jerome Powell’s press conference where he indicated that a potential 0.75% interest rate increase in the months ahead was not under consideration. This fueled, for lack of a better term, a massive “relief” rally in stock prices for the remainder of the day with markets rising about 3%. The next day, these gains were more than erased in the biggest one day drop since the covid-inspired recession in March of 2020.

So what is going on? Well, it owes to the same concern that has been dominating the narrative since the beginning of the year – inflation. The Fed combats inflation through increased interest rates. The fear is that the Fed, in combatting inflation with higher interest rates, will ultimately drive the economy into recession.

Yesterday, in the boardroom of our downtown office I attended a presentation by Jim Allworth, the Co-Chair of RBC’s Global Portfolio Advisory Committee. The perspective of our advisory committee is that inflation will peak soon (perhaps as early as next week’s Consumer Price Index (CPI) report), and will recede somewhat in the second half of 2022 and more in 2023. While there are signs in secondary and tertiary data that indeed inflation is already peaking, getting confirmation in the highly followed CPI report will go a long way to rebuilding market confidence insofar as it may ease expectations for sustained aggressive rate hikes by the Fed through the remainder of 2022. Make no mistake, rates are going up, and will go up by “a lot” by year end. But any ease in what constitutes “a lot” would likely mean that the worst of the pessimism is behind us.

And to reiterate what I’ve been writing on a nearly weekly basis, and as Mr. Allworth forcefully asserted yesterday, we do NOT see recession coming anytime soon – certainly not in 2022. Mr. Allworth spent considerable time going through the seven metrics constituting our recession scorecard and highlighted that ALL are still flashing green. And most of the indicators have a very wide margin of cushion before they begin flashing yellow, let alone red. Is the economy slowing? Absolutely, yes. It had to slow coming off the red hot 2021 rebound year following the 2020 covid-induced recession. But in absolute terms it is still strong and as Mr. Allworth reiterated in the very first slide of his presentation – “if there is no U.S. recession on the horizon, give equities the benefit of the doubt.”

Confirming the strength of the economy, for the fifth consecutive month (in other words, EVERY month of 2022) the U.S. reported monthly new jobs created of over 400,000. Such sustained growth in jobs is extraordinary. Further, the ISM Manufacturing and Services Indices both came in above 55 and 57 respectively. Yes, these latter two indicators are slowing, but they remain at very healthy levels within any historical context. And, returning to our recession scorecard, the one constituent reading that I’ve often cited as maybe RBC’s favourite single indicator, weekly jobless claims, this too sits at near historical lows.

The takeaway message is this: recession is not imminent and equities should be given the benefit of the doubt. That said, return expectations should be tempered. In the immediate short term, next week’s CPI report will almost certainly drive sentiment and returns for the week.

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

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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.