To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 0.5%; the U.S. Dow Jones Index down 0.1%; and the U.S. S&P 500 down 0.3%.
While I rarely comment about the week to week performance of portfolios vs the indices, it’s interesting to note that outsize gains in certain individual client positions (Notably: Alimentation Couche-Tard; Canadian Tire; Element Fleet Management and Cisco) have led to better client results this week vs the cited indices.
Also of note this week in client portfolios was the switch from Manulife (as it brushed up against our analyst target) to Sun Life (for which our analyst maintains a significantly higher target). As clients know, I’m not a highly active trader as I prefer to let securities play out according to a long-term ownership thesis, but 2023 has certainly gotten off on a more active foot (Year-to-Date: Microsoft for Home Depot; Cargojet for PPG Industries; and Sun Life for Manulife).
Portfolio comments aside, our attention turns – yet again – to inflation. The January readings for both Consumer and Producer Price inflation came in hotter than expected this week. On the surface, the 0.7% month-over-month reading in the Consumer Price Index certainly seems to give pause to my recent argument that the annualized month-over-month rate of inflation since June of last year was coming in below the Fed’s target of 2.0% (obviously, 0.7% x 12 is MUCH higher than 2%). HOWEVER, there is an important caveat. If one strips out the effects of rent inflation which has a very well-known lag effect (I’ve written about this phenomenon before), the remaining rate of month-over-month inflation is a much more palatable 0.24%. Further, if one ADDS BACK IN the very likely DEFLATION in rents in the here and now (i.e. removing the lag effect), then inflation continues to come in below the Fed’s target – despite what the headlines scream.
I’ve said to clients many times in conversation during annual reviews I’m presently conducting that I believe one of the prime motivations for the U.S. Fed’s very aggressive fight against inflation is to save face. After initially suggesting in mid to late 2021 that rising inflation was transitory, the Fed was late to fighting inflation. I think it’s fair to say that the Fed doesn’t want to be seen making a second mistake on inflation. Asserting this belief was admittedly putting myself “out there” a bit, so it’s interesting to see commentary from Atul Bhatia, one of our noted RBC strategists, writing in the past 24 hours about the institutional “bias” at the Fed and how its policy decisions of late appear not to be following the economic data. Specifically, he wrote the following in our published Global Insight Weekly:
What makes these potential errors particularly pernicious, in our view, is the institutional and personal incentives at the Fed. The bottom line is that central bankers can cause an unnecessary recession through overly tight monetary policy and emerge with their reputations—and
their institution’s credibility—intact and even enhanced. The converse is not true. Loosening policy early and letting inflation reignite risks permanent reputational harm to the central bank and its leadership. In those circumstances, it’s unlikely that Powell and company will take a truly risk-neutral view of the incoming data and more likely that they will latch on to the most pessimistic interpretation to justify restrictive policy.
If you are at all interested in reading Mr. Bhatia’s full comments, they can be found in the headline article here: Global Insight Weekly
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
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
Visit Our Website: www.nickscholte.ca
It’s an honor to receive referrals. If you have family or friends who would benefit from our services, please let us know.