Andrew Pyle, investment advisor and portfolio manager, CIBC Wood Gundy

FOCUS: North American equities

MARKET OUTLOOK:

After the worst September in 20 years, October isn’t exactly starting on the right foot. Even though volatility has not returned to previous peaks, irrationality is at a premium. Central bankers and institutional investors are in an arm wrestling match but haven’t noticed that the table is starting to disappear. Talk of maintaining an aggressive tightening approach and throwing the “watch the data” mantra to the backseat has taken us well past a 50-50 chance of severe recession. Canada looks most likely to lose in this situation given that fundamentals are already worse than the U.S. and our housing market is more vulnerable to interest rate spikes (compare the percentage of long-term fixed mortgages south of the border with here, plus a record high debt-income ratio).

Friday’s jobs report from the U.S. was not stellar, but anything above 200,000 was going to cement at least a 50 basis point (BPS) hike by the U.S. Federal Reserve on Nov. 2, but the dip in the unemployment rate gets us 75 BPS. As much as the consumer price index (CPI) report this week is a key indicator to watch, the risk is now asymmetrical. If it were to come in heavier than expected, I don’t think the market raises the ante to believing the Fed goes a full percentage point at the next meeting. But if it comes in weaker (like headline down below eight per cent and core below 6.3 per cent), it is doubtful the street will trim rate hike predictions. What is ironic is that if upcoming earnings deliver negative news, either in quarterly results or guidance, this might work to the market’s benefit if it is seen as reinforcing the narrative that central bank policy could force a worse economic outcome than needed.

From an equity perspective, this doesn’t mean stocks can’t stabilize here. The drop late last week and on Monday was as irrational as the bounce a week ago. The 3,600 level is key for the S&P 500 and it is key that the TSX holds above the 18,250 level. A bounce here gives the index an opportunity to test resistance up in the 19,500 area (convergence of 50-day and 100-day moving averages). An extended move higher in crude oil towards US$100 would give the TSX support.

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TOP PICKS:

TC Energy (TRP TSX)

Cameco (CCO TSX)

Open Text (OTEX TSX)