January Roars Out of the Gate

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Global equities rose from a week ago as the US economy grew at a faster pace than expected. Compared with last Friday, the yield on the US 10-year Treasury note was slightly higher at 3.52%, while the price of a barrel of West Texas Intermediate crude oil fell slightly to 80.1. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 18.1 from last Friday’s 19.8.



While many analysts are pointing to the increased likelihood of a looming recession in Canada and the United States, others still believe the dreaded “R” word can be avoided. Although employment remains resilient in both countries, it is hard to ignore the weakening economic data. The Conference Board Leading Economic Index has now been negative for the last seven months. Historically, this would already have the US in a recession or very close to one.

The ”R” word should not scare us as investors, but we need to be aware of the economic environment. Despite the risk, we believe that in a considerably oversold equity market, there are many investment opportunities. Fixed income is especially attractive. Leading into a recession, most asset classes do poorly relative to their long-term averages, as we experienced in 2022. During recessions, investment grade and government bonds tend to do well, and then coming out of a recession, equities and high-yield bonds tend to perform well.

We are currently experiencing above-average returns in January. In our view, if we go into a recession in the latter part of 2023 or the early part of 2024, we are expecting it to be mild.



This past Wednesday, the Bank of Canada raised interest rates by 25 basis points to an upper target of 4.5% and stated that it will probably stop raising rates after this meeting—one of the first among developed markets to declare a pause in rate hikes. If the economic outlook evolves as expected, with declining inflation and slowing economic growth, the central bank expects to hold rates steady to assess the overall impact of the cumulative increases on the economy.



Earnings News

With about 28% of the constituents of the S&P 500 Index having reported for Q4 2022, blended earnings per share show that earnings declined 5.1% while sales rose about 4% compared with the same quarter a year ago.

The US economy grew at an annual rate of 2.9% in the fourth quarter of 2022, slightly down from 3.2% in Q3; last year, economic growth was 1%, compared with 5.7% in 2021. However, in 2021, that growth was fuelled by massive fiscal stimulus and a surge in economic re-openings, while 2022 reflects a more normal pace of growth, consistent with history. While economic output was solid and above expectations, the economy itself may show signs of cooling amid a weakening outlook for manufacturing, home builds, and financial markets.

On February 1st, the US Federal Reserve will probably slow rate hikes to the traditional 0. 50% and may indicate they are nearing the end of rate hikes. In our opinion, what they would need to see is a weakening labour market and lower inflation.

The US Fed’s preferred measure of inflation, the core personal consumption expenditures price index, is moving in the right direction, declining to 4.4% in December from November’s 4.7%, the slowest pace since October 2021.



We expect the ECB will maintain its stance of continuing aggressive rate hikes, likely through the spring and summer, with a 50 basis point increase expected at the next policy meeting.



The Bank of Japan is continuing its ultra-loose monetary policy.

Inflation in Australia shot to 7.8% year over year in Q4 2022, more than expected and the highest pace since 1990, increasing the likelihood that the Reserve Bank of Australia will continue to hike rates. Meanwhile, in New Zealand, inflation rose 7.2% from the prior year, lower than the central bank’s forecast, paving the way for the possibility of less aggressive interest rate increases.




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