To my clients:
It was an up week for North American stock markets with the Canadian TSX up 3.2%; the U.S. Dow Jones Index up 5.7%; and the S&P 500 up 4.0%.
As seen by the weekly returns cited above, the inflection in markets that began two weeks and a day ago continues. Recall that there was a significant reversal in markets that initially reacted very poorly to bad inflation data on Thursday, October 13th, before flipping direction mid-morning and finishing dramatically higher for the day. As I wrote the following day in my weekly update, such reversals, when examined months later and with the benefit of hindsight, can often mark the official bottom in a bear market. As I said then, and I still say now, I don’t yet want to be too definitive about the sustainability of this market reversal…. but, so far, so good.
Of course, the real question is “what is driving the strength of the past two weeks?”. In my opinion, it remains a market almost exclusively fueled by expectations for U.S. Federal Reserve interest rate policy (which, of course, is a reaction to inflation expectations). And on this front, Fed expectations might have been partially recalibrated by the less-than-expected Bank of Canada (BOC) rate increase this week. The BOC, widely anticipated to raise rates by another 0.75%, instead “only” raised rates by 0.50% (all irony intended with this increase coming as it did on the heels of 0.75% and 1.0% increases the prior two meetings). Might the Fed also soon take its foot off the gas? We will find out next Wednesday when the Fed announces its next rate decision.
Interestingly, the economy is remaining somewhat resilient as the first estimate of Q3 U.S. GDP came in at 2.6% vs. expectations of 2.4% and the prior quarter’s decline of 0.6%. So too are corporate earnings hanging in. To be sure, earnings are softening, and some sectors are showing greater softening than others [Alphabet (aka: Google) and Amazon, both held by clients, are notable on this “softness” front – that’s why portfolios are appropriately balanced between “growth” and “value” with a notable tilt toward value), but, by and large, earnings are holding up better than many, even most, feared.
To sum up, the Fed decision next week is “the show”, and we will see if it, like the Bank of Canada, begins to ease up on the rate front. If it does, and again without being too definitive, this two week rally might have yet another leg up.
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
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