To my clients:

It was a mixed week for North American stock markets with the Canadian TSX finishing up 1.7%; the U.S. Dow Jones Index down 0.3%; and the U.S. S&P 500 up 0.3%.

It’s a shortish update this week because, frankly, the message is very similar to that which I delivered one month ago – albeit with some nuance on which I will comment.

It’s the first week of a new month, so the Big 3 economic indicators I almost always cite are the topic du jour. At 48.7, the ISM Manufacturing Index continues its two year trend of contraction (readings less than 50 indicate contraction); conversely, at a reading of 52.0, the ISM Non-Manufacturing Index (aka “Services” which represent over 70% of the U.S. economy), continued its own multi-year trend of expansion; and the monthly Employment Report, like last month (and the prior two months after downward revisions) again disappointed with just 22,000 jobs added.

On their own, the collective message delivered by these three important indicators is caution. However, there are two major caveats that offer the nuance I referenced:

1) at its recent Jackson Hole Symposium in August, the Fed has already signaled that it is likely to shift to “rate cut mode” at its upcoming September meeting. Now with another disappointing Employment Report to consider, it’s possible that instead of the typical quarter-percent cut, a more aggressive 0.50% cut might be on the table; and

2) while employment is undeniably cooling, layoffs (as reported in weekly jobless claims) remain relatively benign. While the monthly Employment Report is undeniably the most tracked and significant economic indicator, it’s worth noting that for recession forecasting purposes, RBC (and several other large-scale institutions) prefer to track weekly jobless claims. Again, these remain benign.

So, while caution is warranted at the present juncture, it does not, as yet, warrant adjustment to the investment strategy I am implementing for clients. It’s conceivable that a more active Fed in rate cutting mode – one that just might deliver a 0.50% cut in two weeks’ time – will provide the necessary support for the economy to continue the broad-based economic expansion. Since markets typically follow the economy, it’s “stay the course” for the time being.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569
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