To my clients:

It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.9%; the U.S. Dow Jones Index down 0.9%; and the U.S. S&P 500 down 0.3%.

Three items on the agenda this week: economic data; Fed Chairman Jerome Powell’s testimony before the Senate Banking Committee; and thoughts on a possible slight shift in portfolio equity (i.e. stock) weightings toward additional U.S. exposure.

The past week has seen the release of the Big 3 economic reports: the ISM Manufacturing Index last Friday; the ISM Non-Manufacturing Index (i.e. “Services”) this past Tuesday; and the U.S. Employment Report today. I’m not going to dwell on these figures other than to say they are collectively softening – not egregiously so, but noticeably. With respect to the Employment Report in particular, it’s worth highlighting that while today’s report exceeded expectations at 275,000 new jobs created in February, there were very significant downward revisions to the prior two reports (with January’s report alone revised down by a substantial 124,000 jobs) and the unemployment rate ticked up by 0.1%.

The preceding economic softening and its likely corresponding impact on lower inflation prompted Fed Chair Jerome Powell to note the following before the Senate Banking Committee this week when he said: “we’re not far from (when) it’ll be appropriate to begin to dial back the level of restriction.” “Dialing back the level of restriction” is Fed-speak for lowering interest rates, and markets which began the week on a very sour note largely reversed course mid-week on these “not far” comments. Market expectations are coalescing around a June rate cute, although an outside chance remains that it could come sooner in May.

Lastly, I’d like to discuss a possible modest shift in portfolio strategy which I am contemplating. This contemplation was brought about by a conversation I had with a sophisticated client yesterday. The client in question is the CEO of a substantial BC-based corporation, and he was lamenting the economic backdrop here in Canada. Issues discussed included:

- high marginal tax rates in Canada (over 53% for top income earners in BC);

- lack of innovation (notably in areas like technology);

- declining per-capita GDP (although Canadian GDP is going up in aggregate, this is being fueled by rapid immigration and masks underlying productivity declines of the existing workforce);

- more indebted consumers in Canada vis-a-vis our American counterparts (yes, this is currently true and a reversal of conditions that existed during the lead-up to the financial crisis of 2008);

- mortgage structures in Canada that expose borrowers to resets every 5-years which, given where interest rates presently stand, is likely to be a huge headwind for Canada over the next 12 to 24 months as low rate mortgages reset at materially higher rates

- the current economic backdrop in the U.S. is stronger than in Canada

Its tough to push back against any of the preceding observations, although the obvious counterpoint would be that the fractious and polarized nature of the U.S. political and cultural landscape and its impact upon the upcoming U.S. election may well inject additional levels of volatility into U.S. equity markets. However, clients will know that I often advise to turn a blind eye to these headline grabbing U.S. political machinations as the U.S. economy is a beast of its own and, in most respects, supersedes its changing political leadership. Frankly, the main reason for the roughly equal weighting of Canada vs. U.S. equity (i.e. stock) weightings in client portfolios harkens back to a long-held RBC maxim that our clients are largely Canadian-based with expenses denominated in Canadian dollars, and significant exposure to investments that match this currency and geographic reality make sense. I continue to ascribe to this perspective. But I also believe that a modest shift toward greater U.S. exposure at the expense of Canadian equities could be made without violating the RBC perspective. I’ll be contemplating this matter further over the coming days and weeks, and have already engaged our internal strategists on the matter.

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

It’s an honor to receive referrals. If you have family or friends who would benefit from our services, please let us know.