To my clients:

It was an up week for North American stock markets with the Canadian TSX finishing up 2.4%; the U.S. Dow Jones Index up 1.1%; and the U.S. S&P 500 up 1.1%.

It’s the first week of a new month and, with it, the usual Big 3 economic releases… EXCEPT, this time its just the Big 2. Owing to the current U.S. government shutdown, the monthly Employment Report has not been tabulated for release. More on that further below. With respect to the Big 2 that WERE released, they both indicate a slowing economy. At a reading of 49.0, the ISM Manufacturing Index continued its greater than two-year streak of contraction (remember that readings less than 50.0 indicate contraction). Meanwhile, the ISM Non-Manufacturing Index (aka “Services”) barely avoided contraction at 50.0. Now the Services Index has offered the occasional head-fake the past few years and this may yet be another. But I’d note that the past three months of employment data have also shown a significant slowdown, so I’d be careful about dismissing the services data out of hand. It bears watching, and I will do so.

Now, it’s important to contextualize the apparent slowing in the economy with what can be done about it. And here there exists a very significant support: The U.S. Federal Reserve. The current Fed Funds Rate sits at 4.00 to 4.25% (effectively ~ 4.125%), and this is significantly higher than most other times the past 20 years. In other words, the Fed has wide scope to lower rates, perhaps aggressively, if the economy truly does stall out and/or enter recession. This is a flexibility the Fed has not enjoyed ever since the 2008 Great Recession. I’d suggest that the soft data this week contributed to this week’s strong market returns in that the data leads to a greater likelihood of further Fed rate cuts.

Regarding the U.S. government shutdown I’ll simply say this: U.S. government shutdowns happen from time to time (there have been 20 since the mid-1970’s) and, similar to regional geo-political conflicts (aka regional wars), they simply have little, if any, lasting impact upon the markets. Certainly there can be enhanced jitters and, perhaps, short-lived pullbacks but, again, they don’t last. I’ll be ignoring the noise.

Lastly, I added Canadian Tire back to client portfolios. After rapidly spiking in price in the late Spring, this holding was sold on June 20th at $183.24/share. It has since pulled back and I added it to discretionary client portfolios at $169.67 this morning. To raise funds for the purchase, I sold Canadian Utilities which was up nearly 3.5% over the same stretch of time. More meaningfully, our analyst’s target is 24% higher in the case of Canadian Tire, whereas the target for Canadian utilities is only 5% higher. Both stocks pay an annual dividend between 4 and 5%.

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
Metrotower 2, 4720 Kingsway, 12th Floor │ Burnaby, BC │ V5H 4N2
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

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