To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 2.5%; the U.S. Dow Jones Index down 2.4%; and the U.S. S&P 500 down 3.1%.
We are only in the month of March, but I’d surprise no one by saying it has been quite the year already given the policy shifts and turns undertaken by the U.S. administration. While many people, including myself, are “tariff-ed” out at this point, we are far from the end of this saga.
Given the continually shifting landscape, and at the risk of being obsolete, I will refrain from providing much of an update on where things stand with respect to tariffs in the here and now. On the one hand, temporary exemptions and delays have emerged recently, which lessens the immediate blow to the economic outlook, and potentially moves us further away from a worst-case scenario. But on the other hand, the constant upheaval in policy has made an already uncertain environment even more unpredictable. Not surprisingly, it is beginning to weigh on consumers, businesses, and investors.
A variety of different surveys released in the U.S. over the past month have suggested a deterioration in consumer sentiment. It has been felt across all demographic and most income groups. Expectations on future business conditions, jobs availability, and income prospects have worsened. Not surprisingly, references to trade and tariffs were mentioned by those consumers that responded to the survey, as were comments around inflation. On the latter, there has been a notable uptick in short and long-term U.S. inflation expectations as consumers have started to brace for the impact that tariffs may have on the price of every-day goods and services. BUT, I will point out what Fed Chair Jerome Powell said just this morning at a monetary policy forum in New York City: “sentiment indicators have not been a reliable indicator of economic activity in recent years.”
On the business front too, recent U.S. business surveys suggest some signs of weakness are starting to emerge. The surveys highlighted that policy uncertainty is weighing on demand growth, both domestically and outside the country. Separately, the U.S. Federal Reserve’s “Beige Book”, which is published eight times during the year, was released recently. It provides a collection of anecdotal feedback taken from a variety of sources across the U.S. Overall, it suggested a slowing of growth across some of its districts. The report highlighted that some manufacturing and construction firms suggested tariffs were already raising material costs and creating uncertainty for long-term pricing and investment decisions.
The previous anecdotal signs notwithstanding, this week’s release of the “Big 3” indicators showed that the ISM Manufacturing Index remained in expansionary territory for the second straight month and the ISM Services Index beat expectations and improved upon its likewise expansionary reading from February. These were encouraging readings and offset with hard data what the sentiment surveys are showing. That said, this morning’s U.S. Employment report showed modestly fewer jobs created than expected (151,000 vs expectations for 160,000) and a slight 0.1% uptick in the unemployment rate to 4.1%.
As this week’s results demonstrate, stock markets have been weaker in the face of these developments, with signs that investors are getting increasingly uncomfortable. Yet, in the grand scheme (particularly after two very strong years for stock markets) the equity market declines have been relatively modest thus far. The question for investors (and for me as a Portfolio Manager) is: what’s next? It is possible the market may see some relief in the short-term given the recent tariff reprieve. Better yet is the possibility of a less threatening tariff outcome by April should some favourable negotiations transpire in the weeks to come. However, the risks of a longer lasting trade war are high enough that vigilance must be maintained.
I’ll finish with another quote from Jerome Powell’s session this morning: “the Fed is focused on separating the signal from the noise.” There is a lot of noise right now, but the underlying economic signals look far from dire – yet. Again, vigilance must be maintained.
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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