To my clients:

Reminder, as of this afternoon, I will be on holiday until December 28th. I’ll check markets and emails sporadically while on vacation, but it certainly won’t be my focus. As always, Brenda will be available during my absence. Also, this will be the last weekly update until the new year on January 6th.

It was a down week for North American stock markets with the Canadian TSX finishing down 2.5%; the U.S. Dow Jones Index finishing down 1.7%; and the U.S. S&P 500 finishing down 2.1%.

The big news this week was a significant decline in inflation, offset by a U.S. Federal Reserve that seemed not to notice as it raised rates by 0.5% and continues to signal the need for continued rate increases ahead. I don’t want to be overly dramatic, but I’m really struggling to see the Fed’s rationale at this stage of the economic cycle. Let me explain…

… on Tuesday, headline U.S. inflation as measured by the Consumer Price Index came in at 7.1% year-over-year. Two things to note on this y-o-y metric: 1) it came in significantly better than the prior month; and 2) stating the obvious, it is still far too high. BUT, here is the thing – looking at inflation on a YEAR-OVER-YEAR basis completely misses the point that most inflation measures peaked in June and that the MONTH-OVER-MONTH measures paint a startling different picture. In fact, the annualized month-over-month rate of headline inflation since June (i.e. the 5 month stretch of July, August, September, October and November) now sits at 2.4%!!! further, the slowdown in October and November is more dramatic still. And these slowdowns come without the full effects of all the rate increases to date having filtered through the economy. Personally, I think the Fed has ALREADY raised rates too far and I’m not the only one. Despite the rhetoric forthcoming from the Fed that further rate increases are necessary AND that there are no cuts expected in 2023, bond markets are already pricing in a slew of rate cuts in late 2023. Why? Because if the Fed maintains its current path, it is all but ensuring a recession mid-2023. As I’ve said before, I’m just a Portfolio Manager based in the lowly outpost of Vancouver, Canada. The Fed is comprised of academics far smarter than me and with much better access to information. If I can see the above, surely they can too. My hope is that, yes, the Fed does recognize the basic argument I have put forth here, and that much of its current forecast for rates is mere jawboning in the hopes that strict words might alone finish the job.

Last note for 2022, and as indicated in my last client update, I executed tax loss sales for discretionary clients this week.

That’s it for this week and this year. Let me wish all clients a happy and safe holiday season!

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
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

Visit Our Website: www.nickscholte.ca

We accept new clients primarily by referral from our existing clients. If you have family or friends who would be a good fit for our specialized wealth management services, please let us know.

Any recommendations herein are for the exclusive use of clients of RBC Dominion Securities and Investment Advisor Nick Scholte. Any other direct or indirect recipient of this email should consult with his/her own licensed investment advisor prior to implementing any investment action he/she may be contemplating.