In a report to investors on Monday, a team of Scotiabank strategists predicted limited gains from current levels in equity markets during the new year. However, the strategists said longer-term opportunities are likely to emerge in the first half of the year and may provide an appealing entry point for investors.
“All leading indicators we track…continue to point, at best, toward a period of economic stagnation, but more likely toward a phase of contraction,” the report said. Additionally, the report noted that all U.S. recessions, since 1970, have seen receding inflation figures. Monetary policy conducted by the U.S. Federal Reserve could take another sharp turn, the report said. The Fed’s interest rate is expected to hit five per cent early in 2023 before it adopts a “wait-and-see approach.”
Previous transition phases between monetary tightening and easing have been “rapid,” the report said. Dating back to the 1960s, the strategists estimated it can take around five months on average for the Fed to pivot on its monetary policy approach. Firstly, the report identified a pause in rate hikes from the Fed as something that will need to be seen for an entry point to emerge, not simply a slowing of the pace of rate increases. “Bottom-up EPS [earnings per share] forecasts are still calling for TSX and S&P 500 earnings to expand next year , which is unlikely to happen,” the report said.