The recovery in global stock markets that occurred through most of November began to fade in early December. With recent interest rate hike announcements, there is a growing view that central banks are nearing the final stages of their rate tightening campaigns. Any resulting optimism is, however, being countered by the reality that we are moving closer to the point at which tighter financial conditions begin to meaningfully weigh on consumer and business demand and overall economic growth.

 

Below, we summarize some key thoughts reviewed in our firm’s flagship investment publication: The Global Insight 2023 Outlook. This publication contains contributions from some of our firm’s key investment resources around the world.

 

In our view, a U.S. (and global) recession is approaching. Historically, recessions arise after interest rates move into restrictive territory, which is the case today. The likelihood of a recession occurring over the next twelve months is high given signals from key leading economic indicators. The exact timing is difficult to pinpoint, but we expect that an economic contraction will arrive in North America around mid-2023.

 

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”. Investors should expect further bouts of stock market pressure next year. Negative news and weak sentiment can become pervasive during these types of periods, requiring investors to maintain their discipline and focus on longer-term thinking.

 

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

 

A silver lining has emerged in fixed income. While bond returns have been historically weak over the past year, it is important for investors to focus 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, with the arrival of recession-like conditions, the diversification properties of bonds and their ability to add ballast to portfolios may re-emerge as important benefits for portfolios.

 

The year 2023 should bring its fair share of challenges. Nevertheless, we remain confident in our portfolio management approach, which maintains an asset allocation that is aligned with each investors’ financial plan and tolerances. We consistently review all positions to assess quality and appropriateness. We expect that 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.

If you have any questions, please do not hesitate to contact us.

 

Drew M. Pallett LL.B. CFP

Senior Portfolio Manager and Investment Advisor 

RBC Dominion Securities

Email: drew.pallett@rbc.com

Website: www.pallett.ca