To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 2.0%; the U.S. Dow Jones Index finishing down 2.1%; and the U.S. S&P 500 finishing down 2.5%.
It’s a bit of a mixed bag of topics this week. I’d like to begin by again reiterating my weekly update of September 29th found here: Dividend Stocks - Why Have they Underperformed and What to Do? As the title suggests, high-quality dividend paying stocks have had a difficult year. The core of my discretionary client portfolios consist of such high-quality dividend paying stocks supplemented by growth stocks which have kept these discretionary portfolios in positive territory in 2023. However, I have a handful of non-discretionary clients (many transitioned from another advisor the past 18 months) who are much more heavily concentrated in dividend-paying stocks. These portfolios are negative for the year. It’s certainly a challenging and frustrating time for this smaller subset of clients (indeed, for my broader clientele too) but I’d like to emphasize some key points: the portfolios are high-quality and sound; the dividends are secure (and likely to grow from year to year); and the current sell-off is, in my opinion, a long-term buying opportunity with very attractive yields available. As I’ve continued to receive questions of concern regarding such portfolios, I’d encourage any client feeling similarly to revisit the weekly update I’ve linked above.
Moving on, the first estimate of 3rd Quarter U.S GDP was released this week, and it came in ahead of expectations at a very strong annualized rate of 4.9%. It’s important to keep in mind that this rate is the real rate of growth, above and beyond inflation, so its impressive indeed. In fact, it is the highest quarterly growth rate (outside of the post-pandemic rebound) since 2014. But is it sustainable? In a word, no. A slowdown, likely significant, lies dead ahead. The bigger question is whether said slowdown will morph into an outright contraction (i.e. recession). Interestingly, looking at historical data, there is little predictive value to the quarterly growth rate just prior to a recession. The average is just below 3%, but the dispersion of individual results is all over the map from the high single digits to slightly negative. So the point here is that recession is not precluded because of this quarter’s strong reading. Myself, I remain on the fence as to whether recession will, or will not, happen. But if it does, I remain of the view that much of the impact has already been priced into markets – particularly after this most recent correction the past 2 to 3 months.
Switching gears, two of three aforementioned “growth” stocks reported better than expected results this week. Specifically, Microsoft and Amazon reported accelerating results and were up for the week, whereas Alphabet (aka Google) reported decent results although a relative slowdown in the growth rate of its cloud business led investors to sell its shares this week. Nonetheless, all three are up handsomely this year, and are offsetting some of the declines elsewhere (i.e. in the dividend stocks) in our diversified portfolios. Next week we get Apple’s results (another portfolio holding of discretionary clients).
Lastly, it’s a big week next week. In addition to Apple’s earnings announcement (which is always important), we also have the Federal Reserve policy announcement (it is not expected t raise rates, but its messaging abut the future propensity to do so will be key to how markets react), and we also have the first week of a new month with the “Big 3” data releases, the most important of which is next Friday’s Employment Report.
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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