Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

 

Markets

Market scorecard as of close on July 8, 2022.

Equity Indices	Level	1 week	YTD
S&P/TSX Composite	19,023	0.9%	-10.4%
S&P 500	3,899	1.9%	-18.2%
NASDAQ	11,635	4.6%	-25.6%
Euro Stoxx 50	3,507	1.7%	-18.4%
Hang Seng	21,726	-0.6%	-7.1%

Source: Bloomberg, RBC Wealth Management

• TSX finished slightly lower in quiet Friday trading. Most sectors lower, health care, materials and energy the big decliners with financial, staples, tech and consumer discretionary the leaders. Canadian equities notched a 0.9% weekly gain to start Q3 after TSX fell 13.8% in Q2, first meaningful quarterly decline since Q1'2020.

• US equities slightly weaker Friday, but higher for the week. U.S. stocks have pulled away from their recent lows during the holiday-shortened week as traders weighed whether the year-to-date declines in the market already reflected peak bearishness surrounding this year’s likely economic slowdown. Trading volumes were relatively light as is typical at the start of July in the pre-earnings season summer lull.

• U.S. banks will open earnings season, and they may provide a roadmap to the direction of the broad market as analysts hone their earnings forecasts.

 

Some Thoughts on a Possible Recession

(excerpted from Global Insight Weekly by the RBC Global Portfolio Advisory Committee, July 7, 2022.)

• RBC Wealth Management’s U.S. recession scorecard, which tracks seven important leading indicators of recession, has recorded some deterioration in just the past week. The all-important yield curve indicator has shifted to the yellow zone along with another indicator, and the manufacturing indicator has flipped from yellow to red. As a group, the seven indicators are still not signaling acute risks that a recession is imminent, but the trend has shifted notably since early June. Recession risks are now higher than before.

• Regardless of whether a recession is already upon us, right around the corner, or could materialize within the next year or two, the bigger question for investors is: To what degree has the U.S. equity market already factored in a recession? With the S&P 500 down almost 20 percent from its peak and some widely owned stocks within the index down much more, while the Nasdaq Composite and the small cap Russell 2000 are both down almost 30 percent, we think much of the weakness has been priced in—as long as the Fed doesn’t slam on the brakes too hard by raising interest rates much higher than is warranted, and as long as inflation doesn’t linger at an elevated level for a long time.

• Market performance can vary widely during recessions. While the S&P 500’s average decline was 32 percent surrounding the previous 13 recessions, magnitudes ranged from just 15 percent to 57 percent. Historically, there has not been a strong correlation between the duration of recessions and S&P 500 declines.

• In all but one of the previous recessions since 1937, the equity market troughed before the recession officially ended. This reinforces a point we make repeatedly: Attempting to time the market bottom is usually a fruitless exercise. The market typically bottoms well before the economic clouds part, often when headlines and investor sentiment are still rather negative.

 

Economy

Canada

• Canada’s GDP grew 0.3% m/m in April, led by robust growth in high-contact service industries and the oil & gas extraction sector. However, there are signs that growth may be slowing, with Statistics Canada’s preliminary estimate for May showing the economy likely contracted 0.2% m/m. With inflation, labour shortages, and rising interest rates beginning to take a toll on economic growth, RBC Economics revised its economic forecasts and now expects a moderate contraction in the Canadian economy in 2023.

• The Bank of Canada (BoC) has so far shown no intention of slowing its current monetary tightening pace and appears willing to endure the economic pain necessary to tame elevated levels of inflation.

U.S.

• June nonfarm payrolls came in better than expected, increasing 372K vs a ~265K consensus. However, unemployment rate remained unchanged at 3.6%, as expected, while average hourly earnings increased 0.3% m/m, also in line with consensus.

• Stronger payrolls seen countering some of the recent pickup in recession concerns, though hawkish reaction in rates not surprising given how much markets have priced out tightening from the Fed. Report further underpins expectations for a 75 bp rate hike later this month, particularly given expectations it will be followed by another hot CPI reading next week.

Further Afield

• The consensus estimate of 2023 European GDP has been falling steadily since the Russia-Ukraine war broke out, but the current consensus still foresees relatively sprightly growth of 1.85%. It is likely to be revised down further as a recession in Europe in the winter months appears increasingly difficult to avoid.

• According to a Bloomberg report, the Bank of Japan will likely raise its inflation forecasts and lower its GDP growth forecasts for the year on the back of rising costs and the heavy impact on Japan’s manufacturing sector from China’s pandemic lockdowns.

 

Notes About Companies in Model Portfolio

• CN Rail (CNR) announced last Monday that the International Brotherhood of Electrical Workers (IBEW) has agreed to binding arbitration, bringing the strike to an end at 00:01 EDT on July 5, 2022. Employees in Signals and Communications will return to their roles at 07:00 AM EDT on July 6, 2022.

 

Feel free to contact me with any questions and/or to discuss investment ideas.

I appreciate the opportunity to serve you and look forward to continuing to help you accomplish your long-term financial goals.

 

Regards,

Shiuman