To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 5.8%; the U.S. Dow Jones Index finishing up 5.1%; and the U.S. S&P 500 finishing up 5.9%.

Coming off the strongest week of market returns in 2023 (see above!), a Federal Reserve rate announcement, and this month’s iteration of the “Big 3” economic releases, one might expect I have lots to write about. And yes, there is an abundance of ammunition, but I’m going to try and pare things back and keep it simple…

… by beginning with the Big 3 economic releases. They ALL slowed from the previous month and ALL came in below expectations (Manufacturing contracted; Services slowed to the near break-even line; and the U.S. added “just” 150,000 jobs for the month of October). Embedded within these economic releases were data points further indicating inflation continues to cool. After a scorching Q3 (recall it grew at a 4.9% real rate the last quarter), the economy is now clearly slowing. Implicitly acknowledging this slowdown, the Federal Reserve held rates steady for the second consecutive meeting (the first time this has happened since the Fed began hiking rates in March of 2022). Further, in the press conference following the Fed’s decision, Chairman Jerome Powell more or less said “let’s wait and see how things play out before raising rates again” (yes, heavily paraphrased, but that was the message I took away).

So, the economy is slowing and the Federal Reserve appears to be “on hold”. Markets shot higher on this news because with interest rates currently well into “restrictive” territory, inevitably, the next step will be rate CUTS - although the timing of cuts is far from certain and could be a long way off into the future (although markets appear to be pricing in the first rate cut sometime in Q2 2024). And, of course, rate cuts are stimulative for the economy and corporate earnings, so the market reaction this week was understandable.

One BIG caveat – as noted, the economy is slowing. In the present environment, that’s good. But if it slows too much, then recession looms. My current stance (which admittedly has vacillated throughout 2023), is that a mild recession is likely. As long as it remains mild, and rate cuts ensue, I think markets are well positioned for further recovery. On the other hand, if a recession materializes and it is something worse than “mild”, then there may be more turbulence ahead. This worse-case outcome is not my expectation.

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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