Economic growth is slowing, but odds of a recession this year are likely no more than one in four, says Sal Guatieri, senior economist at BMO in a report with his outlook for the economies of Canada and the U.S. (More on his growth outlook below.)
Such odds mean chances are good that the bull run will become the longest on record, at more than 10 years if it lasts until July, says Guatieri in the report.
Also placing odds on an extended bull run is a weekly market insights report from Richardson GMP, which cites supportive economic data such as Friday’s impressive U.S. jobs data. Slower global growth is simply “a soft patch,” says the Richardson GMP report, triggered by slower growth in China, trade tensions and the delayed impact of past rate hikes. “These are weighing on growth,” the report says, “but at this point don’t appear nearly strong enough to stop global growth.”
The report also outlines opportunities for investors, as the TSX and S&P 500 are trading at relatively low valuation levels, as measured by aggregate index price-to-earnings (PE) ratios. Though that measure can be obscure since index characteristics change, the measure provides a guide for expected returns, the report says.
For example, an assessment of past index PE ratios and subsequent performance reveals that buying the S&P 500 when it’s trading below 15x provides a better opportunity for gains compared to buying at higher valuation points. The index has been trading at 14.5x so far this year; the TSX, at 12.7x.
Also, the report calculates the proportion of index members of the S&P 500 and TSX that is trading below 10x earnings, which is 21% and 26%, respectively. Those percentages are “by far” the highest in some time, the report says.
While valuations are currently compelling, the report says many investors typically don’t act because “market issues are always front of mind,” a reference to potential economic weakness.
Offering reassurance about the markets, Robert Kavcic, BMO senior economist, says in a weekly equities report that market declines alone aren’t sufficient conditions for a recession.
For example, “stocks fell 19.4% in 2011 and 19.3% in 1998, both cases that were followed by in-cycle rallies,” says Kavcic in the report. Of note, the 1998 case was late in the cycle, and the market had just come off a tech-driven run and external factors led the Federal Reserve to pause its tightening.
Recent market-friendly comments from the Fed indicate that the U.S. central bank is prepared to ease off its current tightening path in response to market indicators, says Kavcic. That’s a positive message for equity markets, “especially at this stage of the cycle where, arguably, a few more rate hikes could mark its end,” he says.
Outlook for U.S. and Canadian growth
Rate hikes will likely come at a measured pace, considering slower growth.
In the U.S., recent stellar growth won’t be repeated in 2019, says Guatieri in his report. While the U.S. likely grew at about 2.9% last year, BMO projects annual growth to slow to 2.4% this year.
“Highly expansionary fiscal and monetary policies and supportive wealth effects are fading, just when capacity constraints are becoming more binding and political instability is set to ratchet higher,” the report says. On that last point, Guatieri says he expects more drama from a divided Congress and a combative U.S. administration.
Economic risks include a more heated trade war, or a deeper dive in equities and oil prices, says the report.
Still, for now, “fundamentals look reasonably healthy, suggesting the economy is merely downshifting to a more sustainable rate,” it says.
In Canada, growth in 2019 is expected to ebb to 1.8%, says the report, in light of the slowing U.S. economy and factors such as depressed oil prices. That compares to an estimated 2.1% rate of growth in 2018.
The slower growth and economic risks have BMO calling for a slower pace to monetary policy, at two rate hikes from the Federal Reserve and Bank of Canada, says the report.