Here are some comments from Macan Nia, Co Chief Investment Strategist at Manulife Investments:

The recession has been postponed but it’s not time to pop the bubbly! Soft landing, hard landing, or no landing? These scenarios are front and center in the financial media, and many aren’t even sure what they mean! In essence, the question is what type of slowdown will we experience in the U.S. and Canada? We believe that the recession has been postponed but not canceled.
 
Many investors point to the strong employment market in the U.S. as a positive signal that a recession has been avoided. However, we argue that the unemployment rate is a lagging rather than leading indicator. This seems to be more true now in a post-COVID environment, as employers in some industries continue to find it difficult to fill outstanding positions, leading to a practice called job hoarding, a practice where they may be more hesitant to cut staff during a tough environment, choosing instead to cut hours worked.

A study by Insight Global revealed that nearly 90% of small businesses plan to continue job hoarding in 2023.
 
While there’s no mathematical equation as to how many indicators need to be yellow or red before we become confident that a recession is knocking on the door, the leading indicator column clearly shows that the balance of risk skews to the downside when it comes to the U.S. economy.
 
The recession has likely been postponed, not cancelled, and as we enter the next stage of the economic cycle in the coming quarters, asset allocation focused on quality in equities and bonds will be crucial.

Inflationary pressures likely remain sticky through 2023 but should continue to show signs of unwinding. The unwinding of base effects from early 2022 should lead to a slower disinflation in goods starting in the middle of 2023, which is already evident in energy; food is showing promising disinflationary signs, as well. Services inflation excluding shelter, which is an indirect proxy for wage pressure and medium-term inflation, will be slower to moderate and remains a critical determinant of monetary policy stances.

The opportunity in bonds has been one of the most prominent messages in financial circles to begin this year. While there’s no denying this, we believe it’s more important to invest in the right bonds. The elevated levels of volatility in the Treasury curve shows how important it is to be flexible and active when managing fixed income. It’s not as simple as choosing short or long duration.

The opportunity in stocks is still positive for longer term but there’s uncertainty near term. U.S. equities have rallied strongly to start the year, but it has been predominantly on the back of the euphoria surrounding artificial intelligence (AI).

New bull markets are rarely built on rallies with this little breadth. The top 10 companies by market capitalization are responsible for nearly 73% of the S&P 500 Index’s 17.1% return this year. An uncertain macroeconomic landscape is a potential headwind for equities (source: Bloomberg, Capital Markets Strategy, July 2023)

The question often comes up as to where a portfolio should be overweight or underweight from a geographic perspective. From a fundamentals perspective, meaning earnings and valuation, there doesn’t seem to be an obvious choice. Given we expect to see an increased risk of a global economic slowdown, we’d expect this to impact potential earnings growth .

Valuations also don’t indicate a clear-cut winner. When looking at valuation, on a trailing price/earnings ratio basis across various global indices relative to their individual longer-term history, many appeared fairly valued . Even though the S&P 500 appears slightly overvalued, much of that can be attributed to the recent rally of the top weights in the index. In environments such as these, it’s often best to look at individual security selection rather than specific geographies or sectors.

Further, a well-diversified portfolio could help smooth out the ride should we experience choppy waters over the near term.

If you have any questions I’m here to talk.

Laura

Source: www.manulifeinvestments.ca