To my clients:
It was a down week for North American stock markets with the Canadian TSX down 0.5%; the U.S. Dow Jones Index down 1.2%; and the U.S. S&P 500 down 0.8%.
It’s the first week of a new month with the usual assortment of important big economic data releases. There were also a couple of secondary economic data points I’d like to note. Add to these the U.S. Federal Reserve rate decision, as well as ongoing earnings announcements, and there is lots to pass along this week. Given the volume of relevant information, I think I’ll cover developments in point form, with a short paragraph of my opinion at the end. So, let’s get to it:
- For the 6th consecutive month, at 47.1 the ISM Manufacturing Index came in below the 50.0 reading that separates contraction from expansion. That said, it did tick up from the previous month and slightly beat expectations.
- On the “services” side (services represent roughly 70% of the U.S. economy), at 51.9 the ISM Non-Manufacturing Index came in just above the all-important 50.0 dividing line separating expansion from contraction. Here too the measure recorded a slight tick up from the prior month, but there is not a lot of room before the very large services sector might slip into contraction also.
- This morning the U.S. reported that 253,000 new jobs were added in April. This beat expectations; was a notable increase from the prior month; and is, frankly, a reasonably solid report even during good times.
- Interestingly though, two other employment measures suggest there may be a bit more weakness lurking beneath the rosy picture painted by the headline employment figure. Weekly jobless claims (i.e. a measure of layoffs) ticked up again to 242,000 for the most recent week. This measure has been creeping up for the past 6 weeks, though it has yet to “spike”. RBC views a spike in weekly jobless claims as one of the most reliable recession indicators we track. Also, the JOLTs Job Openings (i.e. a measure of available jobs waiting to be filled) ticked to its lowest level since September 2021. Admittedly, openings are still high from a historical perspective although I reiterate the recent trend is down.
- Corporate earnings continue to come in better than expected, with the biggest bellwether of them all, Apple (held by clients), reporting very solid earnings last night and leading to a strong day in the markets today.
- And, of course, the big development of the week was the U.S. Federal Reserve announcing yet another 025% rate increase. However, the language used by the Fed strongly suggests that the rate hate cycle has likely, and mercifully, come to an end.
So where does all of the above leave us? Likely with a mild recession staring us in the face. Overall, the general trend in economic data is softening and there is no doubt in my mind that the Federal Reserve has pushed interest rates too high. The lagged effect of the most recent hikes won’t be felt for some time and will, therefore, engender further economic weakness. It’s worth noting that bond markets are pricing in Fed rate CUTS beginning as soon as July. Further, bond markets are also anticipating total cuts of very nearly 1.0% by year-end. BUT, if the likely recession is indeed mild, and rate cuts are forthcoming, then portfolios constructed of high quality stocks (the types of portfolios held by clients) will likely get through the upcoming period of turbulence quite well. Stay the course,
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
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