To my clients:

It was a down week for North American stock markets with the Canadian TSX finishing down 2.3%; the U.S. Dow Jones Index down 0.8%; and the U.S. S&P 500 down 1.3%.

With respect to market returns, is it the pause the refreshes? I’d argue yes. 2023 started out strong and maintained momentum through the early summer. Subsequent summer doldrums led to a roughly sideways market, and this week saw the modest declines noted above. But anyway you slice it, it has been a good year of recovery following a very weak 2022 that, unusually, was NOT accompanied by recession. Just as there were up months in an otherwise down year in 2022, I’d suspect the recent pause will be followed be renewed gains through year-end 2023.

Of course, this begs the questions: why? Well, first and foremost there has been commentary this week from several Fed officials suggesting that “policy” (read: “interest rates”) is in a “good place” and that the Fed can be “patient” leading most strategists to conclude that a September rate hike is off the table. While Fed officials still leave the door open to further rate hikes at the next meeting in November, there is growing belief that this is jawboning intended to prevent markets from prematurely pricing in rate cuts.

the economy continues to demonstrate remarkable resilience. While job growth is slowing (perversely, a good thing insofar as it reduces the propensity of the Fed to enact further rate hikes), workers finding a job remain at decent levels by historical standards. Manufacturing (per the ISM Manufacturing Index) remains contractionary, but it appears to have stabilized at levels above what has historically been associated with economy-wide recession. Further, he more larger “services” sector (about 70% if the U.S. economy) as measured by the ISM Non-Manufacturing Index remains expansionary and actually accelerated its expansion in the most reading earlier this week.

And lest we forget, corporate profits have been coming in largely ahead of expectations. Not exceptionally so, and certainly these “expectations” have been revised down throughout the year, but corporate North America is proving as resilient as the broader economy.

Bottom line is that the Fed just might be able to pull off the difficult feat of the proverbial “soft landing” where a rate hike cycle is NOT followed by recession. It’s far too early to assert such an outcome as a sure thing, but the likelihood is growing. I may even suggest that the odds slightly favour such an outcome at this juncture. This, combined with resilient corporate earnings lead me to believe that markets will finish the year higher than current levels and the recent sideways move in markets will be just as I asserted off the top - a “pause that refreshes” rather than the precursor to a change in market direction.

Of course, much can change in the months ahead and I will monitor and react as appropriate.

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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