To my clients:

Reminder: I will be away on holiday next week, returning after the Labor Day weekend on Tuesday, September 6th. I’ll be connected while away, and will sporadically monitor markets and email. As always, please direct urgent inquiries to Brenda at 778-328-7797 or brenda.goertzen@rbc.com. No update will be written next week. Next scheduled weekly update Friday, September 9th.

It was a down week for North American stock markets with the Canadian TSX finishing down 1.2%; the U.S. Dow Jones Index down 4.2%; and the U.S. S&P 500 down 4.0%.

A reminder of what I wrote in my update on August 12th:

“trees don’t grow to the sky, nor do markets go in a straight line up. Some slow down or give back is inevitable at some point along the way.”

Well, after typing that message, and after a solid 1.5 months of recovery in July and the first part of August, the inevitable give back has begun. But, even with the give back these past two weeks (particularly today), markets are still up more than 10% off their nadir lows. Let’s reiterate why…

… at their worst, the broader markets were off more than 20%, and certain parts of the market (like the tech heavy NASDAQ) were down more than 30%. Sustained market declines in excess of 20% are known as “bear markets”. Research internally here at Dominion Securities reveals that sustained bear markets have always been associated with U.S. recession (not Canadian recession, not European recession, not Japanese recession but, specifically, U.S. recession). Further, as I’ve also mentioned in conversations with clients (most notably my calls to all clients in June), the current economic environment is perhaps the trickiest I’ve encountered in my nearly 25-year career. The cross-currents of inflation, war, supply-chain disruptions and lingering covid concerns in the face of a very strong labor market and other indicators of economic strength have made recession forecasting difficult. As it stands, RBC’s proprietary 7-point internal scorecard now leans toward the likelihood of recession. Yet, given the strength of the economy entering 2022, combined with a continued red-hot labor market, it is difficult to foresee anything other than a mild recession were it to occur.

And that’s the rub. The bear market in the first half of this year looks to have already priced in a mild and short-lived recession. As I’ve often emphasized to clients, markets are “forward looking” and perhaps the recovery seen in June is indicative of a market already starting to peer through to the other side of a mild recession and anticipating the subsequent return to growth. In other words, the damage may have already been done. I continue to think that broad markets will continue to recover from current levels through year-end although, admittedly, likely not enough to reverse what seems destined to be a down year overall (as happens, statistically, once every four years).

Certainly the market action seen today was not helped by U.S. Federal Reserve Chairman Jerome Powell’s speech in Jackson Hole, Wyoming. Simply put, Powell emphasized that the fight against inflation continues, and that interest rates will continue to be increased as the Fed wages its battle. It is an open-question at this juncture whether the next Fed meeting in September will see a 0.50% or a 0.75% rate increase. Incrementally, the markets edged toward the 0.75% probability based upon this morning’s speech, although I’d remind clients that there is one more set of inflation prints between now and the Fed meeting. If slowing inflation continues to build upon last month’s data, then that may well push the narrative back to an expectation for a lesser 0.50% hike. In the short term (the next 1 to 4 weeks), this dynamic is likely to drive the direction of markets. Nonetheless, high quality, dividend-centric portfolios (i.e. the type held by clients) will get through this stretch just fine.

That’s it for this week. Back in September, 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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