To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 2.4%; the U.S. Dow Jones Index down 2.9%; and the U.S. S&P 500 down 4.3%.
In addition to being the first week of a new month with the usual “Big 3” economic releases, it is also the start of September – a historically volatile month. This combination proved especially challenging for stocks this week.
On the Big 3, the ISM Manufacturing Index continued to contract for the 21st time in 22 months. There was no huge surprise with this metric as it really has maintained a consistent pace of contraction since December of 2022.
Meanwhile, the ISM Services Index continued to eke out mild expansion, also continuing a broad trend since December of 2022. Superficially it would seem one ISM index (Manufacturing) offsets the other (Services). However, it should be noted that Services represents a roughly 4x greater share of the economy than Manufacturing, so let’s call it “advantage Services”.
Of course the biggest of the “Big 3” is the monthly U.S. Employment Report and, at just 142,000 new jobs created in the month of August, this metric disappointed. Further, there were significant downward revisions to the prior two months of employment data, with the revised July number now showing just 89,000 jobs created in that month. The referenced three month stretch represents the weakest pace of hiring since the depths of the pandemic.
these data releases reveal a slowing economy, although not an outright contractionary/recessionary one. With U.S. overnight interest rates remaining near 5.5%, none of this should be a surprise. As the U.S. Fed has repeatedly acknowledged, with inflation now on a sustainable trajectory back to its 2.0% target, prevailing interest rates are too high and restrictive to economic growth and, over time, were certain to slow the economy. Slowing is now apparent for all to see – including the Fed. Today, two separate voting members of the Fed acknowledged the underwhelming employment report and spoke generally of the slowing economy. Both affirmed the time has come for a rate cut cycle to begin at the next Fed meeting later this month and, further, both also explicitly left the door open for a possible 0.50% cut.
Through my lens, the market this week grappled with stock valuations that perhaps were pricing in a near perfect runway ahead, and now may be dialing back those valuations in light of the apparent slowdown. But even if the slowdown morphs into a recession, I reiterate that it is likely to be shallow and short, and that the Fed has lots of room to support the economy with rapid, and potentially large, rate cuts if it proves necessary. As such, I am not repositioning portfolios to any overtly defensive stance. But I am also cognizant that the remainder of 2024 is likely to be choppy and that I, and clients, should steel ourselves for this potentially uncomfortable stretch.
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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