To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 0.4%; the U.S. Dow Jones Index flat with no change; and the U.S. S&P 500 down 3.1%.
Leveraging from my recent quarterly letter to discretionary clients, I’ll note that the recent downward trajectory in markets has been predominantly inspired by a recalibration of U.S. rate cut expectations exacerbated by geopolitical concerns in the Mideast between Israel and Iran.
With respect to the former, as the calendar rolled over from 2023 into 2024, expectations were that there may be as many as seven U.S. rate cuts this year. This stands in stark contrast to the current expectation of +/- two rate cuts. Fueling this change in outlook have been a string of three hotter-than-hoped inflation reports as well as a U.S. economy that remains persistently, and surprisingly, strong. All else being equal, markets prefer a lower rate environment to a higher one. The next big event on the rate expectations front will be the release of the Fed’s preferred measure of inflation, the PCE Price Index, next Thursday. I’ll watch with interest.
With respect to the latter Mideast conflict, as with most such geopolitical events, I have only vague notions about how this might play out. But absent a full-fledged war that draws in other world powers, I’d suggest, as always, that clients do their best to limit their concern to the human suffering, and not spend undue time fretting about a potential impact upon their portfolios. Sadly, history is replete with such conflicts and, beyond knee-jerk short-term spasms (likely responsible for some of the weakness in markets this past week), markets and economies tend to power forward in spite of the humanitarian toll. I reiterate, it’s sad, but it also reflects the reality that the global economy is an immensely large and complex entity that promulgates the collective goal of human advancement, and regional conflicts do little to hinder this improvement.
Now, the preceding all said, markets had an exceptionally strong finish to 2023, and a similarly strong start to 2024. A correction of some consequence was long overdue, and the current downturn may well be it. But I reiterate what I said earlier - that the U.S. economy remains persistently, and surprisingly, strong. Bull markets don’t typically end when this is the case. I’ll be staying the course on behalf of clients.
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
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