To my clients:

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

Last week, after very nice gains, I sold Element Fleet Management (EFN) and U.S. Bancorp (USB) from discretionary client portfolios. This week I replaced the EFN position with Canadian Pacific Kansas City Ltd (i.e. “CP Rail”). The recent acquisition of Kansas City Southern by CP is expected to result in some meaningful synergies and cost savings as CP integrates the Kansas City Southern network. These synergies have led our analyst to assign an attractive upside price target for the shares. I have yet to finalize a replacement for the USB shares also sold, although I’ve narrowed it down to a small handful of candidates and expect to add this new position early next week.

I’ve purposely avoided spending much time in these weekly updates on the upcoming US election, largely because the size and scope of the U.S. economy supersedes which party or leader controls the White House. Studies have shown that markets, notwithstanding the occasional knee-jerk reaction, simply don’t react in any lasting or meaningful way to U.S. Presidential election results. The exception to this observation is if either party sweeps control of the Presidency, House and Senate. A typically divided Presidency, House and Senate impose limits on U.S. executive power and are key to the steady-as-she-goes trajectory of that country’s economic growth – as opposed to the more whipsaw like behavior evident in other developed democracies with fewer such checks and balances in place (like Canada) . The point here is that I do not anticipate any meaningful changes in portfolio positioning as a consequence of the U.S. election UNLESS there is a sweep. If a sweep occurs, I’ll likely implement a modest reduction in equity exposure with said reduction being re-evaluated on a periodic basis.

Now, the preceding said, I’ve nonetheless been receiving questions about the election so, for those interested, let’s take a look – and thanks go out to Libby Cantrill of PIMCO for much of this analysis (Note: I’ll attempt not to inject my own views into this summary, and just present what polling data and objective observation reveal):

- Currently, very tight polls indicate that roughly 200k voters will determine who wins the election. In particular, it appears that Pennsylvania will be the determining state for the White House.

- There are headwinds for Kamala Harris given the immigration and border situation, with Trump outpolling on economic issues.

- For his part, Trump faces his own headwinds as he polls lower on temperament as well as his role in overturning Roe v. Wade.

- There is a strong chance that we will not know the outcome on election night – three states are slow to count, and it could be a day or days later that we learn the winner.

- There is a high likelihood of a shift in the divided Congress, with the Senate likely moving from narrow Democratic to narrow Republican control, while the House remains uncertain but slightly favors a flip to narrow Democratic control.

- The U.S. deficit is projected to remain high at around 6.5% of GDP regardless of the election outcome.

- Tax reform will be necessary after the expiration of the Trump tax cuts in 2025, with Kamala Harris proposing significant tax increases, while Trump aims to extend the existing cuts.

- Should Trump win, he cannot remove (as he has threatened to do) Chair Jerome Powell from the Fed, as he is protected by law until his term ends in May 2026, and Trump will not have the opportunity to nominate new members until January 2026. I’ll remind readers that, in my opinion, the Fed Chair is the most important individual impacting U.S. and global economies and markets (more than the U.S. President).

- As I stated off the top, markets tend to go up regardless of the winners – sector-wise, traditional energy is likely to benefit under Trump, while renewable energy companies could thrive under Harris.

- Defense spending is expected to increase regardless of the winner.

- Regardless of which party wins, high deficits are expected to persist.

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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