As we know, 2022 was a tough year in both the bond and equity markets. There were several events that created this environment, including: a wave of cash from COVID benefits drove spending, resulting in inflation and causing central bankers to raise interest rates rapidly; the war in Ukraine sent a shock around the world; and the continued lockdowns in China wreaked havoc on supply chains worldwide.
Some of these issues are dissipating or are having less of an impact on the markets. Inflation is coming back down (although not yet visible in grocery stores), relieved by improved supply chains and the reopening of China.
For these reasons, we are optimistic in outlook for 2023.
Looking forward, consensus seems to believe that there will be a recession this year, but it will be softer, milder, and shorter than originally expected, propped up by a robust labour market. We do believe that the housing market may have continued pressure on it, but that it will not necessarily spill over to the equity markets. It could also be argued that the recession has already been priced into the equity markets and should provide a faster path to recovery. There has been some evidence of this. At time of writing, the TSX is up 6.2%, the S&P 500 up 4.3%, and the Nasdaq is up 8.1%, and we’re not even through January. It already feels better than last year.
We expect inflation to continue to decline from current levels. At the peak, US inflation reached 9%+; it is currently 6.5%, and we expect that it will look more like 3.5% by mid-year. Canada’s trends are similar. The bond markets are forecasting a drop in interest rates over the year – we’ll see if central banks follow those indicators. This would not only be good for borrowing but also give a lift to bonds and bond funds.
We are currently in favour of Canada and even Europe over the US equity markets, which are currently valued higher (i.e., It’s less on sale). In Canada, at least growth will likely continue to be dependent on energy and materials. Banks also benefit from positive commodities markets because oil and gas producers, along with miners and lumber companies, boost production when commodities prices are high. To do so, they need money. To get it, they typically go to the banks to borrow. All around a good environment for Canada.
We are glad to put 2022 behind us and look forward to coming up for a breath of fresh air in 2023.
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