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How Bad Will the Layoffs Get?

January 30 to February 3, 2023


How Bad Will the Layoffs Get?

January 30 to February 3, 2023

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Weekly Commentary

Market Recap

  • Equity markets rallied this week on hopes of a soft landing for the economy.
  • The S&P 500 rose 2.5%, with consumer discretionary, banks and technology leading the pack. Defensives (i.e., staples and health care) lagged, consistent with the broader market move back into riskier assets in recent weeks. On the year, the S&P 500 has now calmly added 6%, while the Nasdaq has popped 11%.
  • Meantime, the TSX gained 1.0% as technology, health care and financials were all firmly higher. Rate-sensitive sectors (see REITs especially) have shot out of the gate with a 10% gain so far this year, and this week’s 25 bp hike-and-pause by the BoC helped the cause.


Recent earnings report seem to suggest companies are beating estimates and doing fine. Is that what we’re really seeing? In our evaluation, it’s a case of expectations vs. reality. In actual terms, some earnings numbers have been impressive and others less so. But overall, the earnings picture has appeared strong because it’s coming against the backdrop of lowered guidance. It’s that outperformance relative to expectations—in other words, optimism about 2023 after a tough 2022—that has fueled the market’s rebound. Going forward, the question is—will guidance start to pick back up? Or will this be a one-time surprise? The reality is that a slowing economy and the impacts of interest rates and a weakening consumer are likely to affect future earnings. We believe that the outlook is still overstated, and we expect downward revisions and lowered earnings outlook.

Bottom Line: Going forward, earnings won’t necessarily be bad, but there is room for disappointment.


In previous weeks, we’ve discussed layoffs in the tech sector, and the big question was—will job losses spread to other sectors? We expected they would, and that’s exactly what has happened, as we’re now seeing layoffs across the board. This is likely to continue for the time being because the inflation impact has been reversing, meaning that price points are coming down and even if demand stays the same, revenue will drop. In that scenario, the only way to maintain the status quo (in terms of profit and loss) is to cut costs, hence the layoffs. The silver lining is that while unemployment is likely to rise, it may not be as bad as it could be because employers know how difficult it is to hire people back. Companies will make sure that any position they’re cutting is one they can do without for an extended period of time.

Bottom Line: We’re likely to go from a very strong job picture to merely a good or okay one, with a bad one being prevented by the difficulty of hiring employees back.

NYSE Glitch

Last Tuesday, the New York Stock Exchange experienced a technical glitch, with some big-name stocks—including McDonald’s, Uber, Sony, Walmart, and Exxon Mobil—opening well above or below their closing price the previous day. Trading of the affected names was briefly halted while the issue was corrected, and most of them reopened 5-10 minutes later. Overall, the glitch wasn’t a big factor in markets, and it didn’t cause any losses in our portfolios. When these sorts of technical issues happen, they typically only impact trading for an hour or two at most, and any problems or invalid trades get corrected or rewound in short order. Last Tuesday, the bigger story was Microsoft’s earnings disappointment, which prompted a decline before investors ultimately shrugged it off. That rebound, and excitement around central banks’ likely pausing of interest rate hikes, tells us that the market is rooting for a victory.

Bottom Line: The glitch highlights the fact that these sorts of issues do occur every so often, but usually, they’re a non-factor for investors.

Interest Rates

Last week, the Bank of Canada raised its benchmark interest rate by another 25 basis points. But the news that grabbed headlines was Bank Governor Tiff Macklem’s announcement that, due to declining inflation, the Bank expects to pause rate hikes while it assesses the impact of previous increases. The 25-bps hike was in line with our expectations. But if there was a mild surprise, it was the Bank’s decision to hit the pause button now rather than waiting another month to gather more data. From the Bank’s perspective, inflation appears to be declining at a good pace, the supply side of inflation is improving as supply chain issues are resolved, and previous rate increases need to be given a chance to filter through the economy. We always said that the Bank of Canada would be likely to stop rate hikes before other central banks because they started first, and our expectation is that they’ll spend the majority of 2023 on the sidelines. If consumer debt becomes a bigger issues and housing values drop further, we could see a rate cut from the Bank of Canada late in the year. But that’s not our base case.

Bottom Line: The most likely scenario is that the Bank of Canada won’t cut rates until 2024.


No positioning changes to report since last week. Next week, we’ll be meeting to determine our house view for the month of February, and the questions we’ll be asking ourselves are: Have we moved too fast? And are we in the right spots? For now, we’re comfortable with a more balanced portfolio, especially in light of stronger earnings reports recently. We’ve also seen some validation for our underweight position on Canada. That’s because the BoC’s pause is likely because they see a weakening consumer outlook, which will ultimately impact GDP.


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