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CA-EN Institutional

From Soft Landing to No Landing?

February 20 to 24, 2023


From Soft Landing to No Landing?

February 20 to 24, 2023

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Weekly Commentary

Market Recap

  • Equity markets pulled back this week, alongside sticky inflation and a shift in expectations toward more Fed rate hikes.
  • The S&P 500 fell 0.3%, with energy deep in the red.
  • The TSX dipped 0.5% despite a surge in health care.

Market Expectations

Last week, yields on six-month U.S. Treasuries topped 5% for the first time in over 15 years. What does that say about the market’s expectations? First, it’s an indication that investors think inflation will be sticky and not necessarily come down in a straight line. The easy part of tackling inflation is over; the hard part—the stickier stuff—is what remains, and that needs to be priced in. We expect central banks to remain aggressive, and markets are increasingly sharing this view, with evidence that the U.S. Federal Reserve could hike rates more than a couple of times in the coming months. This development also shows that the economic environment has changed. Not so long ago, many investors were expecting an interest rate plateau and potentially even rate cuts sooner rather than later. We thought this was overly optimistic, and we’ve proven to be correct. The economy has held up better than expected, and as a result, a potential recession has been pushed further out, meaning fewer job losses than expected and less of a reason to cut rates this year. For months, the two camps in the recession debate have been soft landing vs. hard landing. Now, there’s a third option: no landing. The market seems to be exactly attuned to the Fed’s expectations, and that doesn’t happen often.

Bottom Line: The market’s expectations have shifted, and a recession now looks less likely.

New Data

New U.S. jobless claims and housing starts data were released last week, and they provide some insight into the state of the economy. To begin with the housing starts—we’re seeing them slowing down, which is a good thing. The U.S. housing market is getting close to a bottom, because when and if the expected rate hike pause from the Fed happens, that should represent the peak for mortgage rates, after which rate cuts will begin to be priced it. One of the ways for the housing market to recover is for demand to build up without sufficient inventory; when people try to buy a home but there aren’t enough on the market, prices are pushed back up. With this housing starts slowdown, we’re seeing the beginning of that process. On the jobless claims front, the numbers look relatively good. They highlight that we’re not really seeing a weakening job market just yet—rather, we’re seeing announcements of job losses, which will take three to six months to become reality. It’s a tale of two economies: we’re still seeing some anomalies of hiring being done at the lower end of the wage spectrum. But higher bands are being economized because of the impact they can have on profit margins.

Bottom Line: The overall job market remains relatively strong despite much-publicized layoffs.

Sentiment vs. Reality

When asked their feelings about the economy, investors say they’re nervous. But at the same time, we’re seeing money come into markets, with interest in speculative names picking up. That doesn’t reflect caution—it reflects the expectation of a rally, and no one wants to miss out. Overall, the street still isn’t overweight equities; they’re expecting some manner of a slowdown or recession. But there has been a small rotation back to names that were beaten up last year. This apparent gap between sentiment and what the market is actually doing is indicative of how certain expectation haven’t worked their way into the economy just yet. Take the job market as an example: layoffs have been announced, but they haven’t taken effect yet, creating a difference between expectations and reality. January was an exceptional month. Markets will likely grind higher with pullbacks along the way, but we’re probably not going to see that performance repeated until the Fed announces its rate hike pause. We may have gone up too fast in January, so February could be a reprieve.

Bottom Line: Investors say they’re nervous, but their actions tell a different story.


When we evaluate our positions, we think about short- and long-term outlooks. Energy is a great example. In the short-term, we expect a sideways market or slight movement lower. That’s a good time to sell calls to generate additional income, which we’ve been doing. But in the long term, the benefits of China reopening and demand outweighing supply should boost energy prices. Plus, energy companies—which is what we’re really invested in—are profitable and have access to cash, which should help on the earnings side. And those companies remain under-invested in, so there’s the potential for more investment to push prices upward. Taking a step back, it’s still a choppy market—we’ve seen that in February so far. That’s why we continue to utilize a ‘collar strategy’ in our portfolios, in which we sell calls and buy puts. We aren’t expecting a smooth ride—economic data, Fed comments, earnings numbers, and other factors all have the potential to upset the applecart. In that kind of environment, we want to make sure we have the protection of options in our portfolios, and we’re willing to trade off some upside to do so.


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