To my clients:
If you prefer, read this week’s update on my website. Feel free to share the link with family, friends and colleagues:
As of this writing, it has been an up week for North American stock markets with the Canadian TSX so far up 0.8%; the U.S. Dow Jones Index up 0.8%; and the U.S. S&P 500 up 1.8%.
My apologies for the early update this week as I have a doctor’s appointment to attend in the early afternoon. Frustratingly, I’m dealing with a secondary post-covid infection. I feel generally fine apart from mouth sores and a shockingly sore throat that makes it very difficult to speak.
As the numbers above indicate, it was an up week for the markets. But for a pair of reasons, client portfolios did substantially better: 1) clients will know that I do not hold energy exposure in portfolios, and energy was down over 5% this week reducing the overall headline gains of the indexes; and 2) many of the technology names held by clients did significantly better than the overall indexes.
Being the first week of a new month, the Big 3 economic indicators were released. ISM Manufacturing (actually released last Friday on Canada Day) came in weaker than the prior month and below expectations at 53.0. But ISM Services beat expectations at 55.3. And Employment came in more than 100,000 jobs ahead of expectations at 372,000 new jobs created in June. Collectively these indicators continue to suggest that the economy is holding up quite well.
That said, RBC’s proprietary 7-point recession scorecard has deteriorated. Without digging into the weeds, suffice it to say that of the 7 indicators we track, 4 are green; 2 are yellow; and one is red. Frankly, this split of readings is more historically representative of how our scorecard typically looks when the economy is EXPANDING rather than the solid array of green readings we had been seeing for most of the prior 18 months and which was more of an anomaly. In other words, the collective reading continues to suggest that recession is not imminent. Further, the one red reading is in the least reliable of the 7 indicators and has often given false positives in prior cycles. Here at RBC, we view it more as a corroborating indicator than one we would react to. Admittedly, one of the yellow signals is in the most important indicator we track – the yield curve. Specifically, the 1-year to 10-year portion of the yield curve. Were this indicator to invert, we would need to pay heed. But I emphasize that it has not yet inverted, and it may well not. We/I shall track this one specific indicator closely.
But here is where another point needs to be emphasized, and it’s one that I made in my calls to clients two weeks ago: EVEN IF recession were to arrive sometime in 2023 (we don’t believe 2022 is in play… just see the employment numbers cited above as to why), the decline in markets the first half of 2022 already appears to have priced in a mild recession. Based on current economic strength, we would not expect any recession, were it to occur, to be anything more than mild.
Next week will be important for markets. Consumer Price Index (CPI) data is released on Wednesday, and hopefully we may see some evidence of inflation having peaked in the headline number which includes energy and food costs (Note: as I’ve previously indicated in prior updates, core inflation which strips out food and energy costs appears to have already peaked having now declined for 3 consecutive months); but perhaps more importantly to this observer will be the release of Producer Price Index (PPI) data the following day. The reason being is that producers have a much higher exposure to commodity costs (think oil, gas and metal prices), and commodity costs have been dropping quickly. If these drops are reflected in the producer price data, it is likely that consumers will see commensurate drops soon thereafter. Drops in Producer and/or Consumer price data next week may give the U.S. Federal Reserve cover to be less aggressive in their rate hiking cycle than currently anticipated by markets. If so, that would likely fuel further market recovery.
That’s it for this week. My apologies again for the early delivery. 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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