As we head towards the end of the year, a new report from Scotiabank is highlighting key investment themes for 2023.
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.
“Investors’ mindset should thus transition from seeing the glass as half-empty to seeing it as half-full, as we will eventually look through the EPS [earnings per share] valley,” the report said.
Some of the key themes identified in the report included shifting concerns from inflation to recession, another prospective turn in monetary policy and potential indications of an ideal equity market entry point.
INFLATION TO RECESSION
Inflation is projected to ease in 2023; however, the report said this will likely be replaced by recessionary concerns.
“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.
Inflation may remain above the targets set by central banks in the new year, but it should come down from peak levels due to stabilizing supply chains and a decline in commodity prices, the report said.
It also said the costs associated with moving goods by truck and ship have “dropped abruptly,” and commodity costs are now below peak levels.
Additionally, the report noted that all U.S. recessions, since 1970, have seen receding inflation figures.
MONETARY POLICY PIVOT
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.”
The Fed and other central banks around the world conducted a significant tightening campaign in 2022, the report said, in a series of moves that drove up the cost of credit and resulted in banks restricting its availability.
“Hence, what could start as a pause in the tightening phase is likely to morph into easing in late 2023 as macro data deteriorate further,” the report said.
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.
“An easing cycle starting late next year appears very likely if macro data keep worsening,” the strategist said.
ENTRY POINT
The current bounce in equity markets is unlikely to last, according to the report, which suggested investors “resist FOMO (fear of missing out) once again.”
Despite the pessimism held by the strategists on current market gains, a few things might signal an appropriate entry point for investors into equity markets.
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.
Secondly, the strategists said a “reset” in earnings expectations would need to take place.
“Bottom-up EPS [earnings per share] forecasts are still calling for TSX and S&P 500 earnings to expand next year (about four per cent in both markets), which is unlikely to happen,” the report said.
Next, a bottoming in leading economic indicators like the yield curve would need to happen, according to the report, which notes the majority of previous market bottoms occurred after the yield curve inversion was finished.
A yield curve inversion occurs when short-term bonds have higher yields than longer-term bonds, which is the opposite of the typical pattern and is a potential signal for an upcoming recession.
Lastly, the strategists identified that signs of capitulation will be need to be seen before an entry point can be identified.
“Investor sentiment surveys are accordingly depressed, but equity allocation remains too high and cash allocation too low to call a bottom,” the report said.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
