To my clients:
As indicated last Friday, this week’s update comes a day early.
It has so far been a mixed week for North American stock markets with the Canadian TSX down 0.6%; the U.S. Dow Jones Index down 0.4%; and the U.S. S&P 500 up 0.5%. Important note: declines in the indices cited owe largely to declines in the energy sector which is down approximately 10% so far this week. As clients know, I do not hold energy in portfolios. Hence, performance this week has been nicely positive for the equity portion of client portfolios.
It is the first week of a new month, and with it come the usual Big 3 economic releases. On Monday, at 52.8 ISM Manufacturing declined slightly from last month’s reading of 53.0, but beat expectations of 52.0. Conversely, at 56.7 ISM Services re-accelerated to the upside coming in ahead of last month’s reading of 55.3 and far ahead of expectations of 53.5. Tomorrow, the always important U.S. monthly Employment Report will be released. Expectations are for job gains to slow to 250,000 from last month’s exceptional reading of 372,000.
As can be seen from the prior paragraph, it’s hard to make the case that the U.S. economy is currently in recession. Readings of over 50 in both ISM reports indicate expansion (and a reading of 56.7 in the services sector is actually quite healthy in a sector representing roughly 70% of the economy). And any time there are positive job gains, that too is obviously expansionary.
But, it’s also worth noting that weekly jobless claims at 260,000 came in higher than expectations and have generally been trending upward for 17 weeks. Long-time clients might remember that the trend in weekly jobless claims is a stand-alone indicator that RBC favors when forecasting recession. So this trend is at odds with the otherwise healthy economic indicators cited earlier.
Overall, it would seem the odds of a mild recession sometime late 2022 or early 2023 are growing. It’s by no means a certainty, but I’d characterize the chances at perhaps slightly higher than 50/50 at this stage. That said, if the next two inflation readings (prior to the next Federal Reserve meeting in September) show substantial improvement as I expect (and as I wrote about last week), this could dramatically reduce the urgency for the Fed to continue raising interest rates aggressively. Such a turn of events could again swing the odds of a mild recession back to less than 50/50… perhaps dramatically so.
The current environment remains tricky and markets are certain to remain volatile through year-end. However, I’d note that: a) if there is a recession, I’d not expect anything worse than a mild recession; b) markets already appeared to have priced in a mild recession at their June lows; and c) markets are forward looking and therefore recent gains in stock prices may already be anticipating the recovery on the other side of any possible recession. Because of this, I’d expect further market recovery through year end. Probably not enough to get back to even for the year, but hopefully close.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
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