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The Recession That Never Arrives

July 4 to 7, 2023


The Recession That Never Arrives

July 4 to 7, 2023


Market Recap

  • Half of 2023 is now in the bag and financial markets have had plenty to chew on.
  • The broad macroeconomic backdrop shows an economy holding on relatively well despite widespread concern about recession—many buffers in place for the economy are proving their worth.
  • The flip side is that inflation remains stubborn, leaving both the Bank of Canada and Federal Reserve to grapple with short-term core metrics that are still well above their comfort range.


Have you heard the story of Schrödinger’s cat, the theoretical feline who simultaneously both exists and doesn’t exist? That’s a bit like the recession that may or may not be on the horizon. Recent macroeconomic indicators point to a relatively strong economy. The big question is—are they a temporary blip, or is a downturn really no longer likely? In short, we think that a recession is still in the cards. What the data highlights, however, is that it is likely to be shallow and short-lived. Recently, we’ve been speaking with some third-party researchers who see a much stronger recession scenario; labour market numbers—which have been viewed by most analysts as a sign of the economy’s resilience—are backward facing, and these researchers believe that leading indicators like Purchasing Managers’ Index (PMI) numbers coming off and consumers increasingly tapping into their savings signal a higher likelihood for a hard landing. Though their assessment differs from ours, we still want to take it seriously. But our view remains that the economy is holding up relatively well, and that markets are likely to keep chugging along until we see greater job losses or some kind of major negative surprise, like a spike in inflation or the U.S. Federal Reserve doing something totally unexpected. We don’t anticipate any of those potential developments occurring in the near future.

Bottom Line: The potential for no recession has gone up, but a relatively mild recession remains the most likely scenario.

Central Banks

Last week, leading central bankers from around the world met in Sintra, Portugal, for the ECB Forum, where they reaffirmed the need for more policy tightening to combat inflation. While nothing from the meeting altered our thinking on geographic allocation, the comments do reinforce our view that Europe will continue to be more aggressive with interest rate hikes because they’re at a different stage of the cycle than other developed economies. Inflation in the Eurozone remains much higher than in North America. The European Central Bank (ECB) is thus faced with an interesting conundrum: Do they follow the path of the Fed and Bank of Canada (BoC), both of which have paused in recent months? Or do they hike aggressively to catch up? We expect the latter, which tells us that there will be pressure on European consumers and is why it’s wise to be slightly underweight that market. Canada and the United States, conversely, are holding up fairly well, hence our neutral position on those regions. The one question mark relates to housing—is it stabilizing, or is it just taking a breather on the way down? Much of the evidence points to a stabilization, which is a good sign because it will begin to positively impact consumer sentiment. That, ultimately, will cause people to keep spending.

Bottom Line: It’s important to be aware of where each region is situated on the rate path and inflation cycle, because that will affect the consumer psyche.


Nvidia shares have been soaring the past few months, and some investors have raised questions about the sustainability of the recent artificial intelligence (AI) boom. In our view, Nvidia has a great story ahead—in fact, they’re really the only AI beneficiary whose stock surge is justified by their earnings. That’s important, because while other companies have been given a boost by the AI theme, they don’t have the same actual revenue tied to AI. Nvidia has moved tremendously in a short time span, but unlike their competitors, they have a history in the AI space to back it up. If there is one concern on the horizon, it’s the Biden administration’s talk about banning chip exports to China. We view this as a real political risk, and it has already caused both Nvidia and AMD’s stock to pull back somewhat. Going forward, it could slow growth, but the demand for Nvidia’s products is likely to increase further as more and more companies dip their toe into AI. One might question Nvidia’s valuation in the moment (which is completely fair), but in the longer term, it’s a great company with a great story, and its outlook remains strong.

Bottom Line: Nvidia is tied to all the right themes—and unlike others in the AI space, it has proven itself time and time again.


Economic data continues to support a balanced position. There’s no doubt that some parts of the economy are softening, but there’s nothing indicating that the economy is weakening severely. That means that it’s business as usual for markets, and that the Fed and other central banks don’t need to make any dramatic moves. There’s little question that markets will remain volatile—in recent weeks, we’ve seen a persistent back-and-forth between up days and down days. That further reinforces our neutral position, as the constant up-and-down makes it difficult to ascertain which direction markets are heading in the longer term.


A detailed breakdown of our portfolio positioning is available in the latest BMO GAM House View Report, titled Know When to Hold ’Em.


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