Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

 

Markets

Market scorecard as of close on Friday September 2^nd, 2022.

Equity Indices	Level	1 week	YTD
S&P/TSX Composite	19,271	-3.0%	-9.2%
S&P 500	3,924	-3.3%	-17.7%
NASDAQ	11,631	-4.2%	-25.7%
Euro Stoxx 50	3,544	-1.6%	-17.5%
Hang Seng	19,452	-3.6%	-16.9%

Source: Bloomberg, RBC Wealth Management

• TSX finished higher Friday, though well off best levels seen early in the session. Sectors mixed with materials and energy the outsized gainers, financial, staples and real estate also higher. Tech and health care the big decliners, with utilities the other notable laggard. Canadian equities logged a 3.0% weekly drop, third straight weekly decline and largest since 15-Jul.

• US equities were lower in Friday trading, closing just off worst levels after reversing an earlier rally. The major indexes each logged weekly declines, and S&P registered a third straight weekly loss of more than 1%. Market went on the defensive after news of extended Nord Stream pipeline shutdown.

• Stocks initially rallied on August nonfarm payrolls report that saw job growth slightly ahead of consensus, an unexpected backup in the unemployment rate and a softer-than-expected increase in average hourly earnings.

• U.S. stocks ended August on a weak note, with the S&P 500 Index down nearly 4% for the month, reversing solid gains at the start of the month. The risk-off pivot halfway through August was driven by a perfect storm of higher interest rates and a stronger dollar (see chart) which impacts the foreign earnings of U.S. companies. Geopolitical concerns also resurfaced over increased tensions between China and Taiwan, and renewed COVID-19 fears in the former. Even some positive U.S. economic news, including better-than-expected labor market data ahead of the important August jobs report due Sept. 2, was not enough to reverse the trend.

 

Economy

Canada

• The Canadian economy modestly accelerated in Q2 as GDP rose at a 3.3% annualized pace after a revised 3.1% increase in Q1. However, this growth was below consensus expectations of a 4.4% increase.

• Declines in housing investment and household spending on durable goods detracted from growth, as did a rise in imports that exceeded exports. The increase in import volumes (+6.9%) was led by passenger cars and trucks, particularly electric and hybrid models, whose appeal has been enhanced by high gas prices. Export volumes rose 2.6% in Q2 (after falling 2.3% in Q1) thanks to strong U.S. demand for aluminum.

U.S.

• Many long-term investors look to Federal Reserve speechmaking for insight. In reality, those sound bites have been an unreliable guide to future policy moves.

• Fed Chair Jerome Powell’s widely anticipated keynote address at the monetary policy symposium in Jackson Hole, Wyoming, took a hawkish tone, emphasizing the central bank’s commitment to fighting inflation, even if it results in slower growth and higher unemployment. Price stability, he argued, is a prerequisite to stable, long-term growth and robust job creation.

• Powell’s speech offered helpful clarity on near-term policy moves, as we believe he largely solidified the idea that this month’s policy choice is between an increase of 50 and 75 basis points (bps).

• The Fed is a remarkably poor predictor of its own behavior. Even the members who vote on policy have been unable to forecast their own future votes with any degree of accuracy. No one has a crystal ball, and attempting to time the market—even in the guise of predicting monetary policy moves—is unlikely to be beneficial to investment returns.

Further Afield

• Euro area inflation surprised to the upside and exceeded consensus expectations in August, rising to 9.1% y/y from 8.9% y/y in July. With inflation now above the European Central Bank’s (ECB) June forecast, markets have firmly priced in an interest rate hike of 50 basis points (bps) at the ECB’s upcoming meeting on Sept. 8, and a further 100 bps of tightening by year’s end. We expect the ECB to downgrade its growth forecasts at its upcoming meeting. RBC Capital Markets is forecasting a European recession in the winter months this year.

• China state media announced that top leaders of the Communist Party of China are expected to propose that the party hold its 20th National Congress on Oct. 16 in Beijing. The national congress is held every five years and is primarily a political event to determine the next group of leaders for the ruling party. This year’s gathering takes on additional significance, as it will be widely watched as an indicator of when China may begin to ease its so-called “dynamic zero-COVID” policy.

 

Notes About Companies in Model Portfolio

Today’s comment is not tied to specific companies, but is a summary of Q3 earnings for Canadian banks released in the past two weeks.

• The Canadian banks wrapped up Q3 2022 earnings with mixed results. To begin, the group built reserves for potential credit losses on a sequential basis in the event the economy continues to cool and loan losses rise. While this likely places a lower priority on share repurchases and dividend increases, we view this build as prudent in the face of rising recessionary risks.

• From a business line perspective, personal and commercial banking was a source of relative strength driven by the sharp rise in interest rates in Canada and the U.S. Meanwhile, wealth management also delivered solid results despite volatile market conditions. On the flip side, capital markets was a drag on earnings due to lower debt and equity originations, partially offset by increased trading activity. Capital ratios experienced a modest sequential decline but remain healthy, in our view, and well above statutory requirements.

• All things considered, we believe the banks are appropriately valued at approximately 1.55x price-to-book compared to the long-term average of roughly 1.85x, baking in a garden variety recession.

 

Feel free to contact me with any questions and/or to discuss investment ideas.

I appreciate the opportunity to serve you and look forward to continuing to help you accomplish your long-term financial goals.

 

Regards,

Shiuman