Good afternoon,
It was a down week in markets broadly, though Friday was slightly positive. Here’s a piece this week from our Portfolio Advisory Group reiterating some of the longer-term issues at play.
Long-term perspectives
Recessions are an ordinary phase of the broader economic cycle, but it is important to bear in mind that expansion is the normal state for the economy and downturns have typically been quite brief.
Recessions are a feature of the economic cycle
The business cycle refers to the recurrent cyclical patterns of the economy alternating between periods of expansion (growth) and recession (contraction). Technically defined as two consecutive quarters of negative GDP growth, recessions can be broadly described as sustained periods when economic activity falls and unemployment rises. All economic expansions eventually end with a downturn. Even though recessions can be unsettling, they are normal and relatively short-lived.
Expansions are the norm
While recessions tend to capture ample media attention, the natural state of the economy is growth. Our analysis of U.S. business cycles since 1945 shows there have been 13 recessions. This means investors should expect to experience an economic contraction once every six to seven years and lasting between two and 18 months, with a 10-month average. On the flip side, U.S. expansions have endured far longer—62 months on average. This implies over the past eight decades the U.S. economy has spent nearly 90 percent of the time in growth mode, which helps explain why over the long run corporate profits have trended upwards and equity markets have generated positive total returns in roughly 70 percent of calendar years.
“Benefits” of recessions
Reframing economic slumps through the lens of opportunities can be useful for investors in maintaining discipline. Recessions can play a useful role of unwinding “excesses” and “imbalances” that may build up in the economy during an expansion, revamping the foundations for the recovery. The turbulent environment that recessions bring about can stoke efficiency gains, catalyze innovation, and foster the emergence of new companies and industries. Crucially, recessions can also surface opportunities in financial markets. Fears over the negative but temporary impact on corporate earnings tend to provoke substantial price declines in stocks and corporate bonds in the early stages of a recession. Excessive pessimism often pushes valuations to depressed levels that can present attractive entry points for investors to deploy capital at discounted prices, enhancing the prospect of earning above-average returns, in anticipation of the eventual recovery.
And on a lighter note!
Open the Pod Bay Doors: This link opens up a short (optimistic) article describing what the author says AI isn’t: Killer software and robots that will spring to life and murder the entire human race – also ruin everything and force us all to watch Marvel Movies until we run right out of drool.
Rebuttal: The link below is just a quick reminder that in the movie 2001: A Space Odyssey, the creepy computer voice known as HAL, is a named from a loose acronym of its full name, which was “Heuristically programmed Algorithmic computer.” And if that’s not creepy enough for you…
HAL: “I’m sorry Dave, I’m afraid I can’t do that.”
RBC Webcast: With a few charts and economic datapoints, in this (38 Minute Presentation) the presenter openly yawns at the 23:33 minute mark. Yup, finance is occasionally boring, we know. But he actually does a great job and covers lots of ground as usual – food for thought if you are up for it.
Friday Charts:
Real estate in Canada has had a good run, and construction costs will hamper housing supply (see chart below from RBC Economics): “The cost of building a home in Canada—or any structure for that matter—has never been higher. Up 51% since the start of the pandemic (Q1 2020), the country’s residential construction price index has well outpaced CPI (+13%). Driving the increase are dramatic jumps in prices for key building materials like concrete and structural steel, up 55% and 53% respectively since the first quarter of 2020. This surge in raw material prices, together with a ballooning population, has also accelerated increases in the development fees and levies imposed by municipal governments.”
Canadian Mortgage interest costs are rising at a record pace (see chart below from RBC’s The Current Account): “Mortgage interest costs surged 29.9 per cent in May as compared to a year ago, when they had fallen by 2.7 per cent. May now marks the eleventh consecutive month of rising mortgage interest expenses, the fifth consecutive month where year-over-year increases have exceeded 20 per cent and the third consecutive record increase.”
Enjoy your weekend!
Mark