Opportunities on the Horizon: Investing Through a Slowing Economy

Regional Previews | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 69 6.4 North America faces a rolling recession CHARLES REINHARD Head of North America Investment Strategy LORRAINE SCHMITT North America Investment Strategist The US shows signs of a “rolling recession” as we enter the second half of 2023. Thoughwe presently favor defensive sectors, such as large-cap consumer staples and healthcare shares, there are undervalued segments of the USmarket to consider adding in the near future. A rotation away from Treasury bills toward diversified, longer duration fixed income assets is also advised. At mid-year 2023, we are suffering the aftermath of “shock and overstimulation,” a time when simultaneous growth and contraction are occurring in the US economy. After the most rapid series of rate hikes in Federal Reserve history, we see economic headwinds building while distortions from the pandemic dissipate. The banking panic that resulted in the failure of three major financial institutions was exacerbated by the Federal Reserve’s sharp pivot to fight inflation. Banks saw the value of their lending books plummet just as depositors were able to access cash rates well above deposit returns. The Federal Reserve continues to seek an end to an inflationary cycle that saw its balance sheet rise from $4 trillion to $9 trillion in 2020-2021 as it dispensed record levels of monetary aid during the COVID pandemic. FIGURE 1 is a simple illustration of the complex tailwinds and headwinds within the US economy as we enter the second half of 2023. The fact that these contradictory conditions co-exist is responsible for the elongation of our entry into and out of what will be a shallow or “rolling” recession. This makes it difficult to identify an obvious recession/recovery pattern that would make for easy investment choices.