BMO Economics' Robert Kavcic says that both the economy and inflation are above expectations, but something must snap eventually
The Canadian economy has proven resilient in the face of multiple headwinds; but inflation remains well above the Bank of Canada’s target.
However, the equities market in Canada and beyond has held up well despite uncertainty and concerns and BMO Economics senior economist Robert Kavcic has been pondering the themes that the first half of 2023 has produced.
In a weekly report on global equities he notes that both the BoC and the Fed are grappling with higher core inflation rates than they are comfortable with.
That said, the central banks’ policy tightening has not decimated financial markets, in fact they are in pretty good shape at the halfway point of 2023.
60/40 bounces back
Among the themes that he highlights is the rebound for 60/40 portfolios with total returns above 11% - driven by a 17% bounce for equities – and this he points out, is in line with long-term averages around 10%.
Earlier this year BlackRock Investment Institute was suggesting a better strategy than 60/40 was tactical bond holdings, public and private investments, and other investing strategies.
The technology sector has seen significant gains in 2023 with a 40% gain this year in the S&P500, while telecoms has gained 36% and consumer discretionary is up 32%.
This tight concentration in US stocks belies a general increase in major markets including Canada, UK, Japan, and Europe.
However, Canada’s equities have a high concentration of rate sensitive industries including banks and energy and Canadian REITs have also struggled.
Inflation vs. economy
Kavcic concludes that financial markets were prepared for a worse outcome at mid-year than has been the case.
Can inflation be brought under control, with higher interest rates the main lever, without the economy suffering a downturn or potentially tipping into recession during the remainder of 2023?
“Looking ahead, that resilience has kept inflation firm and necessitated higher-for-longer interest rates,” he wrote. “The outcome in the second half of the year will likely come down to what runs out of resilience first—inflation or the economy.”
