The stock market continued to show positive signs in April as the economy showed signs of slowing down as higher interest rates and normalization of many trends post Covid continue to work through the economy.
The Federal Reserve yesterday increased interest rates by a quarter of a point and signaled a possible pause on further increases. Due to the recent banking stresses and leading economic indicators pointing to a weaker economy in the coming quarters, we see the Federal Reserve in the US moving to a more accommodative stance as the year progresses.
We still look at current inflation rates that are well above central bank targets globally and more increases seem to be in the cards without a material slowing in the economy. The Bank of Canada has already signaled a pause on rate hikes but that is fluid and could change. The housing market is feeling the pressure of higher rates and further rates hikes could push the economy into a more meaningful recession. We see a moderate recession in North America in the next 6-12 months and the inverted yield curve clearly signals recession risk. We still expect the Federal Reserve in the US to increase rates further in 2023. Without an increase in rates in Canada, the Canadian dollar will suffer against the greenback. Historically a recession arrives an average of two and half years after the initial rate hike. The first hike in this cycle was in March 2022, so we may not see a technical recession of two consecutive quarters of negative GDP until around this time next year.
In my discussions with companies the overall picture I am getting is that there is an overall slowdown in many industries coupled with a more cautious approach. The overall financial strength of corporations is good to weather a mild to moderate recession, the consumer may be more of a question. We see that much of the economic decline caused by higher rates is also a result of a return to normalization to trend for industries that benefited from Covid with a continued benefit now for many of those industries that were hurt before such as travel and entertainment. We feel those industries that are now benefiting from more engagement of consumers will feel the economic impact next year as normalization takes hold in those sectors.
Our view is that if the market and the economy can move along without major disruptions past October of this year, the stock market will continue to improve thereafter with a new bull market forming. It remains to be seen if further banking events will occur that will impact the economy and the market. Some economists are giving the “all clear” but at Investment Strategies, we remain cautious and think there are still some shoes to drop in the sector.
We continue to monitor the stock market and economy seeking opportunities to invest. We are very positive on the North American economy over the next ten years and beyond for many reasons: its global position; its ability to be largely self-sufficient regarding commodities; a large consumer market; technological innovations and initiatives; and the ability to attract talent from all over the world as major competitive advantages. Companies are taking the initiative to cut costs including layoffs and this reflects the stage in the business cycle, as we are well into the slowdown in some sectors such as technology.
In summary, our stance remains unchanged, at Investment Strategies, we are constructive but cautious on the market. We feel that it will not be until after later this year around October to determine if any significant issues or events will emerge that would have a material impact on the stock market. Barring unforeseen economic events such as further material bank failures, commercial real estate issues, and debt restructuring due to high rates, the worst is behind us and the weak in the economy as always will be shaken out.
A Summary of equity index performance YTD to end of April is outlined as follows:
Dow Jones Industrial Average + 2.87%
S&P 500 + 8.60%
Nasdaq +16.82%
S&P/TSX + 6.46%
The current prime interest rate in Canada is 6.7% and 8.00% in the US.
