% return in C$
Canada: MSCI Canada; U.S.: MSCI USA; International markets: MSCI EAFE; Emerging markets: MSCI Emerging Markets. Source: Morningstar Direct
Fixed income and currency
% return in C$
Canada investment grade: Bloomberg Barclays Canada Aggregate; Global investment grade: Bloomberg Barclays Global Aggregate; U.S. high yield: Bloomberg Barclays U.S. High Yield. Source: Morningstar Direct.
Putting a possible recession in context
The term “recession” comes up frequently in the headline news during periods of economic and geopolitical uncertainty, and today’s climate is no different. The popular definition of a recession is two consecutive quarters of negative GDP results. However, the National Bureau of Economic Research broadly defines a recession as a “significant decline in economic activity spreading across the economy, lasting more than a few months.” NEI Investments believes the risks of a U.S. recession in the near term have increased, but a recession this year or next is still not our base case considering that consumer balance sheets are very healthy in the U.S., savings rates are elevated, and higher wages may help cushion against the impact of higher goods and energy prices.
One common, and potentially problematic, assumption about recessions is that major market declines coincide with declines in economic activity. While markets experience bouts of volatility around recessionary periods, the belief that recession news sparks market corrections is not borne out by evidence. When we examine the last 11 recessions in the United States in comparison to the equity benchmark S&P 500 Index, we can see no real case for markets always declining shortly before and during recessions. In aggregate, the declines are fairly moderate. However, what is most important to note is the degree to which stocks bounced back in the months after recessions end. What this means is that investors who leave the market during recessions might only cement their losses, and then miss the sustained growth cycle that usually follows. While each recession presents a different set of difficulties for investors, remaining invested in the portfolio that matches your investor profile has proven to be a sound strategy to ride out market volatility.
How stocks behave before, during, after recessions (as gauged by the S&P 500 Index)