TSX Starts Off 2023 Strong But Canadian Economy Facing Steep Recession

The so-called January Effect, the seasonal trend where the stock market experiences higher returns in January than any other month is in full swing. In fact, the TSX, S&P 500, and Nasdaq are all having their best start to a year since 2019. Despite booming investor optimism, 2023 looks like it will be a rocky year for the Canadian economy with the dual impact of unprecedented interest rate hikes and a slowing U.S. economy leading to a deeper than expected recession.

We’re three weeks into 2023 and already the major North American indices are moving in the opposite direction than they did in 2022. To date, the TSX is up five percent, the S&P 500 has rallied two percent, while the Nasdaq is up almost four percent.

Some sectors are performing better than others. In 2022, Consumer Discretionary was the second worst performing sector, in 2023 it’s the top performer. Technology and Communication Services sectors are also doing well. In Canada, the Basic Materials, Energy, and Financial Services sectors are performing well too.

Will Interest Rate Hikes Lead to a Deeper Canadian Recession?

Despite the quick start out of the gate, investors need to keep their guard up. According to new data from Deloitte, Canada’s latest Economic Outlook, the Canadian economy will enter a deeper recession than previously thought, as the Bank of Canada’s rapid, oversized interest rate hikes cool economic growth. The same actions from the Federal Reserve will also see the U.S. economy slowdown in 2023.

According to the report, the Canadian economy will contract for three consecutive quarters, with the country reporting a 0.9% contraction in gross domestic product (GDP) growth in 2023.

This forecast is a lot worse than the previous outlook provided by Deloitte Canada. In September 2022, it said Canada would slip into a short-lived recession with growth retreating in the first quarter of 2023 and entering into positive territory in the second quarter.

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North American stocks have been on a tear in the opening weeks of 2023, but the economic outlook remains uncertain, with aggressive rate hikes by the Bank of Canada and U.S. Federal Reserve being more impactful than previously expected, resulting in a deeper and longer economic downturn.

While a deeper and more prolonged recession could negatively impact Bay Street and Wall Street, you can downside risk.

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