H2 Outlook: Volatility to Remain A Central Theme
Our view: We expect the wind to continue to blow markets in all directions in H2/2022, similar to what we have observed so far this year. Inflation remains stubbornly high with central banks, including the US Federal Reserve (Fed)and the Bank of Canada (BoC) committed to hiking rates and tightening policy to help restore price stability to markets by slowing demand side inflationary impulses. However, given the lag effect of these policy measures on the real economy, we expect these efforts will have a more significant impact on slowing the economy/and corporate/consumer fundamentals in 2023/2024 rather than in 2022. Moreover, over the short-term, inflation readings will continue to remain hot and keep investors and central bankers on their toes. That said, we foresee a period of uncomfortably high levels of inflation and volatility across global asset classes with few places to hide although there are many places to invest for long term oriented investors! We suggest investors remain selective, well diversified, and focus on de risking their portfolios (i.e., close/reduce portfolio blind spots and/or tighten active relative bets!)
- The US Consumer is Likely to Take a Pause: The US consumer economy is going to slow very rapidly (albeit from a very high level) as soon as savings rates return to normal, which will likely start after Labour Day in our view The way the math works, if the savings rate is normal in 2023 we’d have essentially flat/low single digit nominal consumer growth, consistent with a very slow or recessionary economy, vs ~10% today; this would be a deceleration in growth similar to the Great Financial Crisis (but from much higher levels). Add rapid rate hikes and job losses to this, and it’s going to make it much worse Inflation was unavoidable upon reopening (demand>supply and typical of past early-cycle environments, it’s also largely self correcting, just give supply 1-2 years to catch up and for excess demand to revert to normal. However, the Fed is clearly not patient.
- Few Places to Hide From: From a US sector perspective, the only place investors have been hiding is in energy (rightly so) and a few other pockets, but if we end up in a global recession, even that will not be safe. We believe the US centric revenue streams and lower P/E value stocks should outperform their higher multiple/growth stocks on a relative basis, and favor certain parts of communications services, real estate, and value stocks more broadly speaking. That said, on a relative basis, we continue to have a preference for the S&P/TSX index, which is currently trading at a 12 4 x P/E NTM earnings (versus the S&P 500 Index at 16 0 x), has a stronger relative earnings profile, and a 20 weighting to energy (versus 5 for the S&P 500 index we expect this to be positive for the index at least over the short term while inflationary pressures remain elevated From a S&P/TSX sector perspective, we believe that Canadian/North American centric revenue streams, and lower P/E value stocks could also outperform their peers, and favor certain parts of Energy, Financials, Materials, and Consumer Discretionary sectors.