Despite hike in rates and speculation around a possible recession, market looks healthy, says CIO
The economy continues to be fairly healthy despite the recent hikes in interest rates and speculation about the possibility of a recession, a report by BMO Global Asset Management found.
“The labour market is reasonably strong, and consumers continue to hold up their end of the bargain,” said Sadiq Adatia, chief investment officer at BMO Global Asset Management, in the report.
“As a result, we see little reason to shift to a more defensive asset mix at this time,” he added.
Adatia further said that there had been signs of softness within the market that has been seen for the past few months, but it has not been detrimental.
When it comes to the sectors, the one that was seen to have a progressive turnout is the technology sector, while the energy sector seemed to have recuperated. Healthcare and financials both showed varied results which may mean that opportunities can still come up.
While the market maintains its cooling state, Adatia believed that there is no need to tinker too much with their asset mix unless the presence of a downturn is felt.
Brittany Baumann, vice president and investment strategist at BMO Global Asset Management, said that the US labour market continued its stability as the second quarter GDP growth reached 2.4%. This suggested that the economy is maintaining its momentum as it ventures into the third quarter.
Baumann also noted that disinflation is expected to continue in the coming months outside of the prices of energy and food.
The likelihood of a recession remained as the yield curve continued to be inverted and the US Federal Reserve still did not cut rates. The fear surrounding a possible recession would only be relieved if inflation dropped immensely, which would allow the US Federal Reserve to begin normalizing the rates.
“The resilience we’ve seen in the labour market means another hike is still on the table. How we phrase it is, ‘a little higher, a little longer.’ We are close to the top but we are not comfortable saying this is it just yet. But it’s very incremental from here,” Baumann said.
When it comes to the Canadian labour market, there seemed to be signs that pointed to a cooling instead of a crashing market. Its growth in the second quarter was close to 1%.
The strengthened growth in population that was underpinned by immigration seemed to be a solid backbone for the country’s economy as it provided an added boost to the demand for housing as well as the supply for labour.
It is expected that the job market will continue to be resilient which would likely lead to another hike in the rates by the Bank of Canada (BoC) by fall. Baumann said that it is likely that Canada will reach its peak rate before the US Federal Reserve does, given that there is already a big sensitivity among households and the economy surrounding the high interest rates.
Adatia believed that a neutral stance regarding the current state of the market is the best course of action unless there is a larger drop in employment, a weaker consumer front which will result in lower earnings, or more aggressive moves from the central banks as all of these are signs of a rapidly cooling economy.
“We see little reason to shift to a more defensive asset mix at this time,” he said.
