By Cole Kachur - Wellington-Altus

Macroeconomic Perspectives: In 2023 — A Slower Economy? Keep Perspective

Dec 9, 2022 | 8:51 AM

“The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of Pattison Media and this site.”

As we move into 2023, there is little doubt that we should anticipate a slower economic environment here at home. With the ongoing pursuit by the central banks to bring down inflation, it is expected that rates will continue to increase, at least for the near term. These rate hikes are intended to slow the economy, and this is expected to eventually bring inflation under control.

For many months, both Canadian and U.S. central banks have indicated that they are willing to push economies into recession to prevent inflation from becoming entrenched, and the media has been busy evoking worry over the potential for an earnings recession or a full-blown economic recession. As one economist put it, “if we do have a downturn…it will be the most well-telegraphed recession in modern memory.”1

Keep Perspective…
While slowing the economy will put downward pressure on corporate earnings, there may be reasons to
keep perspective. Over the longer term, the stock market is driven by fundamentals such as corporate earnings.

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While the biggest bear markets often coincide with the largest declines in earnings,2 history has also
shown that changes in fundamental drivers, like earnings, may not necessarily lead to the same outcome, especially over longer time periods.

For instance, in the 1980s, earnings didn’t grow that much, yet the markets would post significant gains (chart, above). Indeed, there are many paths that the economy and markets can take. What if economies slow and inflation can be reeled in, yet labour markets remain relatively strong? What if earnings don’t fall much during the economic slowdown?

One thing is certain: over time, corporate earnings have continued their upward climb; so much so that one market observer has called it the “inexorable march higher.” While there have been temporary interruptions during recessionary periods, despite inflation, deflation, rising and falling interest rates, bull and bear markets, and everything in-between, the trajectory has been incredible (chart, to right).
Adding to this perspective, acclaimed Wharton finance professor Jeremy Siegel suggests that stocks will remain strong in the long run.

He points to an equity market analysis that shows that the long-term real return, net of inflation, from investing in stocks in the past 30 years (to June 2022) is exactly the same as the past 100 plus years
— a return of 6.7 percent — despite recent events like the current U.S. bear market in equities, the pandemic economic slowdown, the global financial crisis and more. “We know returns are remarkably volatile in the short run. But the long-term real rate of return from investing in stocks is remarkably durable.”3

…and Keep Patient
While it would be ideal to be able to hedge against the risks of slower earnings, inflation, rising rates or a recession, doing so would likely lead to a portfolio that offers a limited chance of upside. No one can
consistently anticipate the timing of these changes so, as advisors, we act as risk managers using strategies to help manage the many paths that the economies and markets can take. This includes having
a plan in place based on individual risk tolerance and goals, using a disciplined approach that emphasizes quality, diversification and asset allocation and making prudent changes where necessary. Let’s not forget that economic slowdowns are an inevitable part of the cycle — and for investors, having the patience to see these periods through is important.

1. Feroli and Silver, JP Morgan economists; 2. https://awealthofcommonsense.com/2020/04/
the-relationship-between-earnings-and-bear-markets/; 3. https://knowledge.wharton.upenn.
edu/article/jeremy-siegel-why-stocks-are-still-durable-in-the-long-run/ Chart: U.S. Corporate Profits Before Tax, 1947 to 2022 (Sept.) (without IVA and CCAdj, US$billions; shaded areas indicate recessions)
Source: FRED database.

https://fred.stlouisfed.org/tags/series?t=bea%3Bcorporate+profits I N V E S T M E NT INSIGHT | 4WELLINGTON-ALTUS P R I V A T E W E A L T H

The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future erformance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable.

The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions.

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