To my clients:

It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.2%; the U.S. Dow Jones Index up 1.4%; and the U.S. S&P 500 up 1.4%.

There were important developments on a host of fronts for the markets and economy this week: the Federal Reserve policy announcement was had; two of the “Big 3” economic releases were made; and a pair of tech stocks (one held by my clients; one not) drove markets higher in the U.S. Let’s discuss…

On Wednesday, to no one’s surprise, the U.S. Federal Reserve held interest rates steady for the fifth consecutive meeting. But in the accompanying press conference, markets were clearly disappointed when Fed Chair Jerome Powell stated that a March rate CUT was NOT the Fed’s base case. I know for a fact that it was this particular statement that markets found disappointing because, as is my long-standing habit, I have a market chart active on my computer screen while watching the press conference and the chart showed an immediate decline in market prices after this statement was made. HOWEVER, I had a different take on Powell’s comments (note, plural). While Powell did indeed say that a March rate cut was not the base case for the Fed Open Market Committee, the statement was accompanied by extended verbiage that revealed (to me at least) that the Fed had been at least discussing the possibility of a March cut. In turn, this suggests to me that if a March cut was at least being discussed as a possibility, then the odds of a cut at the next meeting in May are correspondingly higher. Whether March, May or even June (these are the dates of the next three Fed policy announcements), I reiterate that the next Fed move will be a CUT and it will likely be the first of many.

Now implicit in the expectation that cuts are forthcoming is the accompanying expectation that inflation will continue to moderate. The trend to lower inflation is well established, with some measures (as I wrote about last week) indicating that the 9 month annualized rate of inflation is now BELOW the Fed’s 2.0% target rate. That’s the good news. Tempering this good news is equally good economic news elsewhere that might cause the Fed to hesitate on the timing of the next rate cut. Specifically, the ISM Manufacturing Index ticked up and beat expectations at a reading of 49.1. While this reading is below 50 and still indicative of contraction in the manufacturing sector, the trend here is now improving. More notably, this morning the U.S. Employment Report resoundingly beat expectations by showing the U.S. economy added 353,000 new jobs in the month of January. While this is great economic news and further bolsters expectations that the U.S. will NOT slip into recession in 2024, on the margin it nonetheless raises worries that improvements on the inflation front might stall out. Time will tell on this front.

Lastly, two tech giants reported resoundingly strong quarterly results yesterday. The giants in question are Amazon (held by clients) and Meta/Facebook (not held by clients). The results and accompanying share price surge of these two companies single-handedly drove markets higher in the U.S. today. It’s days like this that underscore the need for proper stock diversification in client portfolios, and why my discretionary clients have exposure to BOTH growth and dividend stocks in their portfolios. Dividend stocks are a great core holding for portfolios, and my client holdings are well represented on that front. But exposure to growth and technological advancement is also important. Without such exposure, its likely that stock portfolios will underperform over the long-term. I reiterate, my discretionary clients have exposure to both areas of the market. (Incidentally, other tech names held in client portfolios are Microsoft, Apple and Alphabet/Google).

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

Visit Our Website: www.nickscholte.ca

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