Economic update

The past few weeks have seen a noteworthy development with inflationary concerns overshadowed to some extent by growing fears of a recession. Most notably, this has resulted in some weakness in commodity markets, such as oil, copper, and wheat, which have all fallen of late. Meanwhile, bond yields have moved lower (and prices higher), while stocks have been somewhat less noticeable, shifting up and down without clear direction. Below, we provide some thoughts on the second half of 2022.

RBC Global Asset Management Midyear Outlook

Our firm’s investment team regularly publishes thoughtful commentary that we read quite regularly. They recently published a Midyear Outlook, in which they discuss the vulnerabilities that remain. The team outlines two scenarios: one in which inflation remains stubbornly elevated, forcing central banks to continue to tighten financial conditions, and the other in which inflation recedes, the economy slows, and the need for more tightening declines. You can read the full report online: Midyear Outlook.

Impact of receding inflation

We agree that challenges remain for the second half of the year, but are hopeful that inflation may peak at some point and start to decline from today’s elevated levels. The potential drivers range from lower demand, to some improvements in global supply chains, and the potential for more subdued commodity prices. Moreover, the base effects of year over year comparisons may lead to a natural slowing in the rate of inflation. The levels will remain uncomfortably high, but in time, a falling inflation rate may result in less volatile market conditions and a potential return to the more typical behaviour and relationship between stocks and bonds.

The pendulum of rate hikes swung to an extreme this year, with central banks feeling the need to raise rates aggressively. This drove much of the volatility in the equity and bond markets. Should inflation recede, it could open the door to the possibility that central banks may not have to raise rates as much as markets expect. That alone could prove to offer some better support for capital markets.

Slowdown in economic growth

Economic growth is slowing and may likely continue to trend in that direction given the tightening of financial conditions. As a result, recession risks may continue to rise. Surprisingly, earnings expectations for the year ahead have not meaningfully adjusted, and we suspect they will have to be reduced to reflect the deteriorating backdrop. That may be an emerging source of vulnerability for equities through the latter part of the year. Yet, weaker growth, or an outright recession, may be what’s needed to help drive inflation sustainably lower.

The period of uncertainty, volatility, and market weakness appears poised to continue for a little while longer. Our approach remains centered on building investment plans that can deliver on the long-term needs of our clients with the expectation that we will have to deal with periods like this from time to time. After all, history has taught us that investors are more likely to succeed in achieving their long-term financial goals by staying disciplined and committed to their financial plan. That has, and remains, a guiding principle of ours.

Mixed news on markets, inflation and other economic developments In this video, RBC Global Asset Management’s Chief Economist, Eric Lascelles, shares a mix of positive and negative updates for the economy. Optimism seems to be lifting financial markets as the outlook for inflation eases. Supply chains are also improving, as are some commodity prices. However, the risk of recession remains high as central banks continue their rate hikes, impacting vulnerable markets such as housing. Watch the video online: Mixed news on markets, inflation and other economic developments

 

Estate and wealth protection

Proper estate planning requires careful consideration of many factors: reducing taxes, providing for loved ones, passing on assets in an orderly fashion, creating a charitable legacy and more. Better understand your choices and make informed decisions with our complimentary estate planning guide, and use the link below to download a copy of our estate planning health-check questionnaire.

Read more online: Estate and wealth protection

Community Corner Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day! RED CARPET: See who rode in this year's Tour de Guelph The Guelph Games set to kick off with Canada Day festivities Living in Relation: An Indigenous Exhibit at Wellington County Museum and Archives Where to watch Canada Day fireworks Downtown Storywalk Challenge brings readers and local businesses together

 

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.