Posthaste: A recession is likely on the way, but there are still opportunities for investors in 2023
A recession is likely in the cards next year, but that doesn’t mean investors are facing an unwanted sequel to a dismal 2022.
Equity and fixed-income markets could be headed for better returns in 2023, with Canadian stocks also poised to benefit compared to those in the United States, according to IG Wealth Management’s investing outlook.
“Peak inflation, interest rates and asset class correlation, with equity prices hitting their lows, will present opportunities to investors who are able to navigate the market environment,” Philip Petursson, chief investment strategist at IG Wealth, said in a news release.
IG Wealth said equities are likely headed for brighter days because markets have already priced in a recession. Historically, the S&P 500 index reaches its highest point before downturns take hold, and sinks to its lowest before they end. That pattern may have already played out in 2022, which points toward “a higher probability of positive returns,” the report said.
The S&P/TSX composite index is also likely to come out ahead, but not because of a strong oil and gas sector, as was the case in 2022. IG Wealth said energy could lose its lustre in 2023, since any oil production increases amid an economic downturn could keep oil prices stable or even send them lower.
Instead, it’s the “significant valuation gap” between the S&P/TSX composite, which is near its lowest value, and the S&P 500, which still hasn’t reached its average, that could move investors away from the United States and give Canadian stocks the advantage in the medium term, the report said.
Further opportunities lie in the fixed-income market. Bond yields and interest rates have reached highs not seen in a decade, IG Wealth said, which means returns will likely be greater over the next 10 years. But cooling inflation and a recession are also good for bond returns, because central banks are more likely to reduce interest rates to mitigate a possible downturn, especially if inflation poses less of a threat.
IG Wealth also expects the equity and bond markets, which have been moving in lockstep throughout 2022, to break free of each other. That’s a good thing for investors because it will create greater diversification across asset classes.
It’s also possible an economic contraction will be a non-issue for investors.
“The force and impact of a possible recession may prove to be shorter, and milder, than historical averages,” Petursson said.
For one thing, growth in the money supply, which helped fuel inflation, has already come back down to normal levels. A strong labour market in both Canada and the U.S. is also likely to take the sting out of any downturn. The result could be a recession “in name only,” the report said.
But there’s another reason a better year might be in store for investors: We could finally be nearing the end of all the economic upheaval brought on by the pandemic over the past two-plus years.
Inflation may have reached its peak, allowing central banks to slow or even cease interest rate increases altogether, so investors may soon begin to feel like they are on steadier ground. As a result, Petursson said the upcoming year will be about “resolving the uncertainties and investors will be rewarded with an improved market environment.”
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A key gauge of United States consumer prices in November posted the smallest monthly advance in more than a year, indicating the worst of inflation has likely passed and validating an anticipated slowing in the pace of U.S. Federal Reserve interest-rate hikes.
Excluding food and energy, the consumer price index rose 0.2 per cent in November and was up six per cent from a year earlier, according to a Labor Department report Tuesday. Economists see the gauge — known as the core CPI — as a better indicator of underlying inflation than the headline measure.
The overall CPI increased 0.1 per cent from the prior month and was up 7.1 per cent from a year earlier, as lower energy prices helped offset rising food costs.
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U.S. Federal Reserve rate decision and press conference
Steven Guilbeault, minister of environment and climate change and minister responsible for Parks Canada; Stephanie Thorassie, executive director for the Seal Watershed Alliance; and Jeff Wharton, Manitoba minister of environment, climate and parks, will make an announcement at the UN Biodiversity Conference in Montreal on advancing the protection of one of the world’s largest ecologically intact watersheds
Cam Davis, an environmental policy expert and lawyer, who will speak about binational opportunities the Great Lakes offer to Canada and the United States to federal parliamentarians in Ottawa
Agriculture and Irrigation Minister Nate Horner will announce a new plan that will support sustainable growth and diversification in rural Alberta
Today’s data: Canadian construction investment, manufacturing sales and orders, new motor vehicle sales; U.S. trade price indices
Earnings: Lennar Corp., Weber Inc.
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Tiff Macklem says elevated debt might make households more sensitive to rate hikes
TC Energy’s troubles mount as Keystone spill remains unexplained after five days
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Howard Levitt: Why you can’t sue for harassment and more notable employment law cases
Competition Bureau pleads to tribunal to block Rogers-Shaw merger ‘for millions of people’
‘Tiff Macklem’s tough medicine:’ Younger Canadians are becoming hardcore savers, poll finds
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Getting an unexpected windfall is generally a good thing, but it can lead to some questions, especially if you don’t need the money right away. Certified financial planner Janet Gray walks one reader through his options after he and his sister received $350,000 from selling part of their parents’ estate, in the latest FP Answers column.
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Today’s Posthaste was written by Victoria Wells (@vwells80), with additional reporting from Financial Post staff, The Canadian Press, Thomson Reuters and Bloomberg.
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