To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 1.7%; the U.S. Dow Jones Index up 2.4%; and the U.S. S&P 500 up 0.8%.
What a difference a month makes. After a dismal September and October, markets surged in November with U.S markets now sitting at, or near, 2023 highs and Canadian markets getting back within range of their own highs. That said, the U.S. dollar has depreciated modestly vs the Canadian dollar, so RBC portfolio values (which for the purposes of discretionary clients are reported in Canadian dollars) are not quite reflecting the prior peak seen in late July/early August.
Why are markets surging? Simply put, because the Fed is done raising rates. Yes, Fed rhetoric continues to leave the door open to further hikes, but the dominant narrative from most Fed spokespeople – including Fed Chair Jerome Powell – is that rates “are in a good place” and “restrictive” and the Fed can afford to be “patient”. Further, earlier this week the first voting Fed member began openly musing about when it might be appropriate to initiate rate CUTS. Canada is probably done raising rates too.
But make no mistake, rate hikes are coming to an end because inflation is cooling and, more important for investment portfolios, economies are slowing. China’s economy is stagnating; Canada reported a 1.1% annualized quarterly contraction (i.e. negative growth) for Q3 which would have been even worse had it not been partially buoyed by government spending; and the main U.S. economic metrics continue to ebb (to wit, the U.S. ISM Manufacturing Index came in below expectations at 46.7 this morning…anything below 50 indicates contraction). Of critical importance to how soon rate cuts might be forthcoming will be next week’s U.S. Employment Report. If it slows further from the 150k jobs gained in October, then I’d expect the anticipation for rate cuts to further build. Consensus currently has cuts beginning in Q2 2024, but a soft employment report would likely see that expectation moved up to Q1.
The preceding said, lets not lose sight of the fact that if the economy slows too much, then recession is the consequence. I’d expect a mild recession would be well tolerated by markets given that there is much more scope to cut rates than any time since 2007 and this should limit the depth and duration of any economic contraction. And, who knows, perhaps the Fed might pull-off the holy grail of Fed policy: a soft landing where a recession is wholly avoided. Based on the trends and trajectories of economic data, this best-case outcome is a legitimate possibility. Time will tell.
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
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