To my clients:
I will be away next Thursday and Friday. Given that U.S. markets are closed for American Thanksgiving on the Thursday, and only open for half a day on the Friday, I’d expect these to be typically quiet days. There will be no update next week.
It was an up week for North American stock markets, with the Canadian TSX finishing up 2.7%; the U.S. Dow Jones Index up 1.9%; and the U.S. S&P 500 up 2.2%.
The economy is slowing. Yes, bold and underlined. This week saw retail sales decline month over month and initial jobless claims tick up in a continuation of a now four week trend. Oil prices are declining in anticipation of slowing demand. And, most importantly for markets and Fed rate policy, inflation is very obviously coming down. This week, both Consumer and Producer prices showed substantial month-over-month declines and both came in below expectations. As a consequence, markets are now pricing in a ZERO percent chance of any further rate hikes, and rate CUTS are now beginning to be anticipated as soon as March. Further, markets now expect FOUR quarter-percent rate cuts in 2024 (i.e. a full 1.0% in rate cuts).
So, this is interesting. The economy is slowing yet markets have surged the past three weeks. In normal times this would be a head scratcher. But these are the tail-end of very not-normal times. I continue to contend that the current economic and market environment is the final wiggle of the whip that cracked with Covid lockdowns 3.5 years ago. Massive stimulus packages and severely distorted supply chains truly did alter the economic landscape, but these distortions have now faded to the deep background and, thankfully, inflation is trending back toward the multi-decade pre-pandemic “normal”. As noted in the first paragraph, this downward trend in inflation will almost certainly lead to lower interest rates in the coming year which will cushion the economy. The real bugaboo pertains to how far the economy might slow. At this juncture, even a mild recession is unlikely to be too disruptive to market prospects given the steep declines seen last year in 2022 (which, in hindsight, certainly seems to have been an over-reaction). More encouragingly, many an economist (though it’s far from a consensus opinion) believe that a fabled “soft landing” is in the cards. A soft landing means the economy avoids recession altogether. Should this be the case, the outlook for markets looks promising.
The next big data release will be the November U.S. Employment report to be released December 8th. An ideal result would see this release show somewhere between 75,000 and 125,000 jobs created for the month. In other words, a marked slowdown from the multi-hundreds of thousands of jobs created most of the past two years, but not an outright contraction.. I’ll be watching with interest.
That’s it for this week. Next update on December 1st. 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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