“While we continue to believe that the most likely outcome is that the global economy will continue to expand, we now expect slower growth and higher inflation, and believe the likelihood of a recession has increased,” the report said .
RBC’s base case is for the global economy to expand if inflation peaks by the end of the year. The company is forecasting global growth of 3.6% this year, up from 6.2% in 2021, but noted that the conflict and the impact of sanctions are creating significant uncertainty. As a result, the company put the risk of a U.S. recession at somewhere between 25% and 50% this year.
The correction earlier this year in major US stock markets has created room for stronger returns even as the war creates uncertainty, the report said. “[G]With investor sentiment extremely bearish and valuations depressed, any indication that the outlook is improving could result in a significant positive shift in investor sentiment towards equities.”
This happened last week as markets rallied following the Federal Reserve’s rate hike announcement, which confused some market analysts.
A Richardson Wealth report noted the apparent mismatch between the ongoing tragedy in Ukraine, the hawkish-sounding Fed as it embarked on its tightening cycle, elevated inflation data – and rising equity markets.
“When bad news doesn’t move markets lower, the path of least resistance is likely up,” says the report.
Federal Reserve Chair Jerome Powell said last week that the Federal Reserve plans to raise interest rates six times this year and four next year. In a speech Monday, Powell said the Fed is poised to hike rates by half a point at multiple meetings.
Bond yields have risen this week, which could prompt investors to turn to stocks for lack of choice. RBC noted that bond yields are “unsustainably low” and will rise even if the war in Ukraine temporarily caps those rises. Longer-term higher yields “create a scenario in which government bond yields are low or even slightly negative for many years,” it said.
RBC forecasts four 25 basis point hikes from the Federal Reserve, Bank of Canada and Bank of England this year, but none from the European Central Bank. Four rate hikes theoretically reduce a country’s economic growth by 0.5% over the following 18 months, the report said — “far from a recessionary impact,” although the pace of the move to tightening poses some risk.
Richardson Wealth pointed out that this rate hike cycle is unusual in that rate hikes typically occur when economic growth is accelerating.
“The good news is that the economy is slowing from high levels, meaning some rate hikes are unlikely to be enough Move the needle a lot,” the report said. “Nonetheless, the pace of slowing growth is critical and we’re already starting to hear about it banter about the r-word” – recession. The writers called the banter “premature.”
Richardson continues to favor growth over value in shorter-duration stocks and bonds, although he noted that the losses in growth stocks may have pushed some names into the value camp.
RBC said the re-rating presents an opportunity to invest cash that was set aside last year when markets turned expensive. He recommends an asset mix of 64% stocks, 34% fixed income, and 2% cash for broader opportunities.
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