A look back and a look ahead: Don’t let recession talk hinder your financial strategy
What happened in 2022?
As we look back on an eventful 2022, we can reflect on a year of unprecedented market moves and a combination of unique macro-economic factors. We started the year thinking that the COVID-19 pandemic was finally in our rearview mirror and expecting that rising inflation would be temporary. There was an escalation of tensions between Russia and the Ukraine, but the effects were localized.
While much of the world has dropped COVID-19 restrictions and closures, China maintains its zero COVID-19 policy, which continues to impact supply chains. Inflation proved to be stubborn, which led to fast and furious interest rate hikes by central banks. In the last few months, we have seen inflation start to show signs of peaking and central banks have started to indicate they may be close to the end of their tightening schedule, which has been positive for markets. Russia invaded the Ukraine on February 24th,which resulted in far-reaching global economic effects over the remainder of the year.
Markets have been whipsawed by shifting opinions on where inflation and interest rates are heading, instant lockdowns in China, and the changing news out of the Ukraine. Volatility has been unprecedented this year, and most, if not all, asset classes experienced a downturn.
This environment has leading economists and various experts in the field to predicting a recession over the short or medium term, and signs of this are starting to circulate in the public space. Most predictions right now are for a short and shallow recession, but there is still considerable uncertainty about the length and depth. Although a recession has not been confirmed, it’s always a good time to start thinking about the possible impact to your financial plan.
Here are some insights to help you understand this economic phenomenon:
What is a recession and what are the effects on the economy?
In short, a recession happens when a decline in economic activity causes GDP (gross domestic product)to fall for several months. Though all recessions are different, they can lead to reduced consumption capacity and investment, or to some job losses.
What causes a recession?
There are several factors that can cause a recession. The recessions in the early 1980s and 1990s for example, were caused by interest rate hikes, introduced to contain inflation, which led to economic slowdowns.
Other factors can include:
- A major and lasting shock to commodity prices
- A financial bubble bursting
- Corporate debt overextension
- Loss of confidence in the economy
- Wars, pandemics, etc.
In the current global context, if a recession does happen, you won’t be surprised to learn that the COVID-19pandemic, the war in Ukraine and supply chain problems that have fuelled inflation and would be some of the primary causes. Also, household debt related to very low interest rates over the past years is contributing to the current situation.
What effects could a recession have on you?
The effects can vary depending on each person’s financial situation. Stock market volatility can affect your savings, depending on the risk level of your investments and the diversification of your portfolio.
You may need to reviewy our budget to adjust spending. Though job losses are still possible, in the current context of the labour shortage, the risk of this is lower than in past recessions. As Chief Strategist and Senior Economist Sébastien Mc Mahon explained in one of his recent economic reviews, when it comes to jobs, Canada is “very strong, very resilient”.
Also, though interest rates have increased, they remain historically low, which helps to support the economy.
If there is a change in your household’s economic situation, you may be tempted to cancel your insurance policy, or put your automatic contributions to your RRSP or TFSA on hold. However, changes like this can have a lasting impact on your overall financial plan.
Can a recession have any positive effects?
Recessions are difficult while they last, but they are temporary and often described as a “necessary evil” which can lead to new opportunities for you or for companies to reinvent themselves or even close, making way for new business initiatives.
People who are invested in the market for the long-term can also benefit when the economy recovers, especially if they are well supported and seize opportunities. Investing fixed amounts regularly is one way to take advantage of these buying opportunities made possible by recessions.
Historical data shows us that following an established plan and staying invested for the long-term is always a wise strategy.
What strategy should you use?
Certain strategies are still relevant, even when the economy is showing less encouraging signs. Here are some examples:
- Stay invested and stay on track with your savings plan
- Keep in mind the risks of selling at a loss when markets are down
- Watch out for potential buying opportunities
- Invest by buying regularly to follow the market and be able to take advantage of upcoming opportunities
- Make sure you have a diversified portfolio
- Build an emergency fund if you haven’t already, and try to rely less on credit
What do we expect for 2023?
We expect that rates will rise again a little bit more, and then central banks will hold for awhile, to let the effects of the higher rates filter through the economy. We think that the central banks may have overtightened and that rates may start to comedown a little in the later part of 2023. We expect inflation may be at or close to its peak, at least in North America. We think that China may start to move away from its zero COVID-19 policy, which would bring a little more certainty to the supply chain. We will not attempt to predict what will happen between Russia and Ukraine. A little closer to home, we expect that the markets will continue to experience heightened volatility. While we think markets have tested the lows, it will not be a straight-line to recovery. We also predict that bonds will provide both higher yields, as well as possible capital gains this year as they recover from the shock rate increases.
What does this mean for your portfolio?
Our advice all year has been that a well-diversified portfolio is your best protection, and that staying the course is your best strategy. We continue to believe this. A market recovery has the potential to be very quick, and we will not know we are in it until it has already happened. Staying invested allows you to participate as markets recover. In all cases, we strongly recommend that you consult our team before making any major financial decisions that will potentially impact your financial strategy. We are happy to help you navigate during these uncertain times, and will continue to provide timely updates to ensure you are well informed.
Sources:
iA Financial Group – Advice Zone: What is a recession? https://ia.ca/advice-zone/finances/what-is-a-recession
iA Financial Group – Economic Publications: Markets are plunging again https://ia.ca/economic-publications/posts/2022/june/markets-are-plunging-again
This information has been prepared by Jessica Mann, Wealth Advisor and Andrea Looker, Associate Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this email comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
