Good morning,

 

A U.S. (and global) recession is likely 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. 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 some volatility next year.

 

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.

 

The year 2023 should bring its fair share of challenges. Nevertheless, maintaining an strategic asset allocation, rebalancing accordingly, and consistently reviewing all positions to assess quality and appropriateness is key.

 

I want to take this opportunity to wish you and your loved ones a safe and happy holiday season.

 

Tim