To my clients:
It was an up week so far for North American stock markets with the Canadian TSX up 2.2%; the U.S. Dow Jones Index up 2.3%; and the U.S. S&P 500 up 2.4%.
Unsurprisingly, and as I wrote about last month, the June inflation report (via the Consumer Price Index released this past Wednesday) fell very sharply. Year-over-year headline CPI fell all the way from 4.0% to 3.0%. Meanwhile, the year-over-year Producer Price Index (i.e. what manufacturers pay and considered a leading indicator of consumer price inflation) fell all the way to 0.1%!!! (Yes, notice that decimal point!) Given BOTH the overstated housing costs which account for over 40% of the core inflation measure (and which should start to recede notably over the remainder of 2023), AND the lagged effect of higher interest rates to control inflation, I strongly believe the general trend in inflation will remain down. HOWEVER, its very possible that next month’s reading might show a temporary slight uptick in inflation readings given that the month-over-month July 2022 reading from last year was 0.0% and this reading will be dropped from the forthcoming year-over-year reading we see next month. So if there is a slight uptick, I for one won’t be panicking.
Notwithstanding the above, in the interviews I’ve seen and read about this week, board governors at the U.S. Federal Reserve continue to speak as though the Fed will follow through on another rate increase at the end of July. NOT-notwithstanding the above (in other words, considering what I wrote in the first paragraph), I don’t think the Fed should do so. But as I’ve said before, I’m just a Portfolio Manager based in Vancouver, BC, and I don’t set Fed policy, so we shall see. For its part, the Bank of Canada (BOC) raised rates another 0.25% this week. The widely accepted narrative in the financial community is that this likely marks the end of the BOC’s own hiking cycle.
What’s interesting and more challenging to decipher is where the economy might be heading in the face of potentially still higher U.S. rates to come. To date, the economy has proved remarkably resilient - without a doubt far more resilient than almost any credible source would have thought at the beginning of the year. The lingering whipsaw effects of the pandemic might possibly be resulting in a truly unique (i.e. “this time is different”) scenario playing out in both the economy and, by extension, the investment markets. While I continue to expect a mild recession, my confidence in that outlook is diminishing. The possibility grows that a fabled so-called economic “soft-landing” might be achieved.
On the investment markets, it was a good week. Certainly not all week’s will be as rosy as we continue through year-end. But I continue to think that with waning inflation, the looming end of the U.S. rate hike cycle and the remarkable resilience of the economy (whether recession happens or not) that the inevitable ebbs and flows will ultimately result in further portfolio gains from here. For my discretionary clients, I continue to position portfolios toward the higher end of the permitted equity range unique to each clients own Investment Policy Statement.
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
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