RBC Market Update - Week ending December 9th, 2022

December 09, 2022 | Vito Finucci


This is our final bi-weekly client letter of the year. As we plan for the year ahead, please share any feedback you may have. This week, we lean on the Global Insight 2023 Outlook and share key takeaways.

The recovery in global stock markets that transpired through most of November has started to fade with the arrival of the final month of the year. Despite recent rate hike announcements, there continues to be a growing view that central banks are nearing the final stages of their rate tightening campaigns. But, any resulting optimism is being countered by the realization that we are also inching closer to the point where tighter financial conditions start to weigh on demand and overall growth.

We take the opportunity below to summarize some key thoughts that have been discussed in our firm’s flagship investment publication: The Global Insight 2023 Outlook. As always, it is worth a read. It has contributions from some of our firm’s key investment resources from around the world.

As mentioned in the feature article, a U.S. (and global) recession is on the way. Historically, recessions eventually arise after interest rates move into restrictive territory, which is the case today. The likelihood of one occurring over the next year is high given the signals emitted by key leading indicators. The exact timing may be harder to assess, but our firm’s view is that an economic contraction should arrive in North America around mid-year.

There are short and long-term takeaways to keep in mind. In the short-run, recessions, particularly those in the U.S., have typically coincided with “bear markets”. And so, investors should expect further bouts of stock market pressure next year. Moreover, negative news and weak sentiment can become pervasive during these kinds of periods. It often requires a level of discipline and longer-term thinking.

Fortunately, when reflecting on the long-term, there are a few simple but important lessons. First, recessions on average don’t last too long, and the mere anticipation of a recovery is often all that is needed to begin a new bull market. Moreover, as time passes, any investment impact from recessions tends to be widely overshadowed by the gains that follow thereafter. Overall, recessions have generally presented themselves as mere blips on the longer-term upward trajectory of stock markets.

Despite the backdrop, a silver lining has emerged in fixed income. While bond returns have been historically weak over the past year, it’s important for investors to focus instead on forward looking prospects. Bond yields are now at highs not seen in well over a decade. As a result, the return expectations from fixed income going forward are meaningfully higher than they have been in quite some time. Importantly, their diversification properties and ability to add ballast to portfolios may re-emerge as an important benefit for portfolios with the arrival of recession-like conditions.

The year 2023 should bring its fair share of challenges. Nevertheless, we remain confident in our portfolio management approach which continues to lean on maintaining an asset allocation that is aligned with your financial plan, rebalancing accordingly, and consistently reviewing all positions to assess quality and appropriateness. We expect income will be an important source of returns in the year ahead, and seek to explore opportunities in areas like fixed income and dividend oriented equities.

We want to take this opportunity to wish you and your loved ones a safe and happy holiday season. We wish you the very best for the year ahead, and look forward to continuing to share our perspectives.

Should you have any questions, please feel free to reach out.