To My clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 0.8%; the U.S. Dow Jones Index finishing up 2.0%; and the U.S. S&P 500 finishing up 1.6%.
Despite the rise in markets this week, volatility (i.e. big moves both up and down) continues to reign. And the narrative driving this volatility remains all about the U.S. Federal Reserve and the path of future interest rates. While there continues to be evidence of month-over-month deceleration in inflation across the broader economy (gasoline notwithstanding… here in Vancouver over $2.40 a litre this morning!), it’s interesting to note that we are once again – as has been the case, off and on, since the Great Financial Crisis of 2008 – facing a paradigm where “Good News is Bad News” and “Bad News is Good News”. Let me explain…
… this, being the first week of a new month, saw the release of the “Big 3” economic indicators that I have been invariably mentioning in these updates for over a decade now. NORMALLY, markets would cheer for strong growth in the Manufacturing and Services sectors (as reported in the ISM Indices earlier this week), as well as the addition of many new jobs and a reduced unemployment rate (as reported this morning in the monthly Employment Report). But now, with the Fed squarely focused on combating inflation, markets are instead looking for dramatically slowed hiring, even job LOSSES, to reduce inflationary pressures thereby allowing the Fed to be less aggressive in raising rates to likewise reduce inflationary pressures.
Okay, so what did the data say and how did it impact the markets? We saw:
- ISM Manufacturing at 50.9, missing expectations for a reading of 52.2, and slowing from the prior month’s reading of 52.8. This notably weaker than expected result in the first of our key indicators saw markets move UP materially for the day (remember, “Bad News is Good News” and “Good News is Bad News);
- ISM Services at 56.7, beat expectations of 56.0, but slowed slightly from the prior month’s reading of 56.9. Not surprisingly, this roughly “neutral” result led to a roughly flat day on the markets;
- Then today, Employment gains totaled 263,000 for the month, beating expectations of 250k, but slowing from the prior month’s reading of 315k. While it could be argued that this too was a “neutral” result as the actual number landed between expectations and the prior month’s reading, the fact is that employment gains of over 250,000/month are historically high. Further, the unemployment rate fell to 3.5% from 3.7%. The Fed would prefer to see unemployment RISE modestly to slow the economy and decrease inflationary pressures (again, Good = Bad; Bad = Good). Markets had their poorest day of the week owing to the continued employment strength.
Collectively, the data this week likely point to a Fed that will continue its aggressive rate hiking path. HOWEVER, next week sees the release of another batch of inflation data which, if better than anticipated, might reduce the likelihood of aggressively higher rates. As I wrote two weeks ago, and reiterated last week, the month-over-month data reveals broadly decelerating inflation ex “homeowner equivalent rents” (about which I ranted a bit in highlighting the deficiency in this particular metric).
Bottom line: Next week I’d expect inflation to show a material deceleration. However, it’s the magnitude of that material deceleration relative to market expectations that will determine market direction. Regardless, whenever the Fed alters its rate outlook, I’m confident we are in the vicinity of an ultimate bottom in markets and bargains are to be had. Accordingly, I used some cash on hand this week to add a beaten down name in retailer Canadian Tire to the Canadian side of client portfolios. Paying a dividend in excess of 4%, and with our analyst maintaining a target over 50% higher than the current trading price, this company ticked all the boxes I like to see in a client holding.
That’s it for this week. All the best, and Happy Thanksgiving!
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
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