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CA-EN Institutional

When Will the Recession Hit?

November 21 to 25, 2022


When Will the Recession Hit?

November 21 to 25, 2022

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Weekly Commentary

Market Recap

  • Equity markets slipped this week, giving back some momentum after last week’s post-CPI surge.
  • The S&P 500 fell 0.7%, as consumer discretionary, banks and energy lagged.
  • The TSX was down 0.6% after running right into its 200-day moving average.

U.S. Elections

The final results of the U.S. election came as a bit of a surprise, as Republicans underperformed relative to expectations. The result is a split Congress, with Democrats retaining control of the Senate while the GOP takes over the House of Representatives. In short, this will mean political gridlock—which, in a way, creates more stability, as extreme policies are unlikely to get through both chambers and the status quo is likely to continue. Looking ahead, the 2022 midterms also cast the 2024 Presidential election in a new light. Republicans had been favoured, but now, it’s up in the air. And there’s also the question of the GOP nominee. Donald Trump—who has already launched his presidential campaign—is obviously the most well-known candidate. But after overperforming on what was a relative down night for Republicans, Florida Governor Ron DeSantis looks like the party’s new standard bearer and a legitimate contender.

Bottom Line: The results of the U.S. election mean the continuation of the status quo—and a little more clarity looking ahead to 2024.

Inverted Yield Curve

Recently, we’ve seen an inversion of both the 2-to-10 year and 3-month-to-10-year Treasury yield curves, which say quite clearly that we’re headed into a recession. But an examination of the economic data—which also points toward a recession—shows one major outlier: employment, which is still strong. There have been signs of looming job losses, but we haven’t yet seen the kinds of layoffs that we’d typically see ahead of a recession, and they’re not going to suddenly happen overnight—it will take further earnings declines for them to come to pass. So, while a recession with a relatively soft landing remains the most likely outcome, two big questions remain: when will it occur, and how will markets respond? The economy is holding up relatively well despite some gradual deterioration, which indicates that it might not be until the second half of 2023 that we see a steeper downturn. By that time, the U.S. Federal Reserve will likely be close to halting its interest rate increases. If that’s the case, will investors be discouraged because of the deteriorating economy, or encouraged by the end of rate hikes? It’s too early to know. But we’ll be closely watching Fed announcements to see if their comments and the dot plots are consistent with the expected terminal rate of around 5%, and correlating that with the inflation prints, to see how fast the numbers are coming down.

Bottom Line: A recession is still likely—but how markets will respond remains an open question.

China Lockdowns

Despite continuing COVID-related lockdowns in China, supply chains have improved quite a bit over the last couple of quarters. China’s strict zero-COVID policy has been the norm for two years, but restrictions do appear to be loosening somewhat, and we expect China to move gradually towards reopening. This positivity has been priced into Chinese equities, which have fared much better over the last few weeks. And as the COVID situation improves, supply chains can be expected to improve even further. In terms of outlook, we remain neutral on Emerging Markets, though we’re somewhat more positive on China than other regions. The trajectory is encouraging, but some caution is warranted—we’d like to see continuing flows into China, and a tough winter season with rising COVID cases could throw a wrench in the works.

Bottom Line: China appears to be heading in the right direction, but we’ll need to make sure that a loosening of COVID restrictions actually transpires.


What are investors focusing on as we near the end of 2022? The first is inflation slowing down, and the other how the Fed will react. But looking ahead to 2023, we believe the focus will shift back to the economy and a potential earnings slowdown, which could prompt markets to sell off further. The upcoming holiday season will tell an important part of the story in terms of a slowdown in demand. We’ve seen mixed results from big names like Walmart and Target, with Walmart’s earnings boosted by strong numbers on the staples (meaning groceries) side, while Target underperformed on inventory. If that trend continues and Q1 2023 earnings disappoint, we may see further job losses as companies look for ways to create margin growth, which is a trigger that could cause the economy to weaken enough for markets to react negatively. Because of these factors, we remain underweight equities. Recently, we’ve also sold some call options on Energy, as we look to take profits and crystallize some gains in what we expect to be a sideways market heading into the year end. As always, we’ll continue to evaluate the situation as we consider future adjustments.


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