Andrew Pyle, senior financial advisor and portfolio manager, CIBC Wood Gundy

FOCUS: North American equities 

MARKET OUTLOOK:

The recovery in equities over the past number of weeks reflects an overly optimistic view toward a pivot in central bank policy and the ability to engineer either just a slowdown in the economy or mild recession. The technical picture for the broader market still hasn’t changed and for the S&P 500, this will require a break of the August intraday high of 4,325 to create the condition for a sustained rally and or end to the bear market. The pattern for the TSX looks better now that we have taken out the August high of 20,323 and we have sustained a break above the 200-day moving average for the first time since August 2020.

That said, it is atypical to see equities bottom before a recession so this rally looks like a head fake. Friday’s U.S. payrolls report has not diminished the pressure on the U.S. Federal Reserve to maintain an upward trajectory for rates, even if the per-meeting magnitudes are less than what we have seen recently. Where inflation and aggressive rate hikes created the environment for the initial pullback in valuations, the baton now gets handed off to economic contraction and earnings compression.

I expect to see the first real damage to payrolls and consumer spending in the first quarter as depleting personal savings and a lagged response of consumer credit growth to rising interest rates suggest a possible contraction. Analysts were a little early on weak employment calls for last week, but we are at the start of a trend, where staffing cuts by large tech firms eventually flow through to small and medium-sized businesses.

Heading into the first half of 2023, the better risk-reward play is still in bonds. This involves shorter-dated investment grade corporates trading at a discount and building duration in Canadian and U.S. government notes.

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TOP PICKS:

Open Text (OTEX TSX)

Boardwalk REIT (BEI.UN TSX)

Northland Power (NPI TSX)