The stock markets declined in August as the Nasdaq lost 2.94%, the Dow Jones lost 2.53%, the S&P was down 2.10% and the TSX was down 1.66% for the month. The year-to-date performance figures for the indexes to the end of August are are positive for the year.  Central banks paused on any further rate increases but rates remain at the highest rates in 22 years and Central banks continue to signal that they are likely to continue to raise rates until their 2% inflation target is achieved.

China economic indicators continue to slow, and it appears that the structural challenges of their economy along with the West’s move away from China and the new cold war are having a negative impact.  A theme we think will begin to show is that the move away from China is providing economic benefits for North America and European economies.  The move away from China is resulting in buildouts, reshoring with resulting jobs as part of this transition, which will be ongoing for years.  This bodes well for western economies.  The Canadian economy contracted 0.2% in Q2 and one more quarter of negative GDP in Q3 makes for an official recession.  The US GDP for Q2 was still positive at an annualized rate of 2.1.

It is our view that the market is taking any negative economic data in stride and reacting well, and Inflation is coming down.  In addition, the job market continues to be strong.  As we have pointed out before, the market is a leading indicator and when bad news is reacted to with moves higher or with no material negative impact it is a sign that the markets expect things to get better in the next 12 months or so. We do expect some negative economic indicators over the next 6-12 months and one or two more rate hikes by central banks.  At the same time, we expect the market to remain flat or have a modest upside as it looks to economic recovery from the coming negative effects of higher interest rates.

As we have stated before, barring a significant event going into the fall, the market has signaled that things are moving constructively.  We are near the end of the tightening cycle, and it is a good time to take advantage of the higher yielding securities.  Interest rates are high for borrowers, but they are also high for those with funds to invest and receive the benefit of higher interest rates.

In summary, at Investment Strategies our stance remains unchanged, as we are constructive but defensive on the market.  We feel that it will not be until later this year, past October-November to determine if any significant issues or events will emerge that would have a material impact on the stock market, such as material bank failures, commercial real estate issues, and debt restructuring due to high rates.  The market is telling us to be constructive as it reacts well to negative news.

A Summary of equity index performance YTD to end of August is outlined as follows:

Dow Jones Industrial Average               + 4.75%

S&P 500                                               +17.00%

Nasdaq                                                +32.86%

S&P/TSX                                              + 4.75%

The current prime interest rate in Canada is 6.95% and 8.50% in the US.