To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing down 1.5%; the U.S. Dow Jones Index finishing down 0.3%; and the U.S. S&P 500 up 0.5%.
Before digging in this week, there was lots of “positive” feedback generated by last week’s update pertaining to the struggles and underperformance of dividend paying stocks so far in 2023. I put quotes on the word “positive” because, unfortunately, the circumstances necessitating the discussion are not what many would have hoped for 2023, but several clients appreciated the explanation and many of those found it to be comforting too. If you missed last week’s update, here again is the link: Dividend Stocks - Why Have they Underperformed and What to Do?
The fact that markets were “mixed” this week is the bad news. The good news is that a disproportionate share of the Canadian losses were concentrated in oil stocks (which my discretionary clients don’t own), and luckily the particular mix of U.S. investments held by clients significantly outperformed the broader indices. Overall, discretionary clients were up for the week and outperformed on both the Canadian and U.S. sides of their portfolios. There will be more good news on the market front further below.
On the economic front, it’s the first week of a new month and the Big 3 (as I refer to them) economic indicators were released. The ISM Manufacturing Index beat expectations and improved to a reading of 49.0. That said, keeping the reading in context it should be remembered that any reading below 50.0 is still contractionary. Meanwhile the larger “services” sector of the economy continued to expand with the ISM Non-Manufacturing Index missing expectations slightly but still registering a positive read of 53.6. But the big news, and deserving of special attention, was this morning’s U.S. Employment Report.
So, getting to it, the U.S. added 336,000 jobs in September. This was a roughly 50% improvement from August, and nearly doubled expectations. If inflation weren’t the issue it has become the past 2 years, such a reading would normally lead to a euphoric market response. BUT, since overly hot labour demand might be construed as being inflationary, the immediate market reaction was a steep sell-off this morning as many investors pondered the possibility that the Fed may hike interest rates still further. But then a strange thing happened. About 1 hour into today’s trading session, the losses were quickly reversed and the overall market (as measured by the S&P 500) turned notably higher. And the question is, why? And the answer would seem to be that after measured reflection, and after the automated algorithms did their thing in the first hour of trading, it was noted that “wage inflation” actually came in lower than expectations and, further, equaled last month’s reading which was also lower. If this dynamic persists, this is great news because it:
a) Reflects a continuing easing of economy wide inflation; and
b) Might be indicating a potential “Goldilocks” scenario where job growth remains strong AND price stability is being regained
At this juncture I would not be willing to endorse the “Goldilocks” interpretation of events; but I wouldn’t dismiss the possibility either. Of particular note is that the markets with their powerful turnaround today completed what is known as an “outside reversal” day where the prior day’s low was exceeded on the downside while the markets closed higher than the prior day’s high. From Investopedia:
An outside reversal is a price pattern that indicates a potential change in trend on a price chart. The two-day pattern is observed when a security's high and low prices for the day exceed the high and low of the previous day's trading session.
In this case it wasn’t an individual security that completed this outside reversal, but the overall market. Over the years I’ve occasionally noted these outside reversal days for the overall market, and often (not always) it does indeed mark an important inflection point for investors. I’ll watch and monitor with interest and, like all my clients I’m sure, hope this is indeed the case following a not very pleasant September.
That’s it for this week. Have a great Thanksgiving! 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
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