Where Should Investors Turn if Canada Enters a Recession?

With many economists and analysts still predicting Canada will enter a recession in 2024, investors may be wondering what they should do? Capitulate, wait on the sidelines, or get involved?

What Are the Odds of a Soft-Landing Recession?

First things first, the long-promised recession has not yet materialized but most believe it will. The Bank of Canada has increased its interest rates 10 times since early 2022 from near zero to five percent.

The big increase in lending costs are putting pressure on Canadians. Household debt to income is more than 184%. This means Canadians owe roughly $185 for every dollar of disposable income. On top of that, mortgage terms don’t extend beyond five years and consumer confidence is at its lowest level since the start of the pandemic.

On the plus side, economists believe the recession will be mild and last less than a year. Paul Beaudry, former deputy governor of the Bank of Canada says the central bank’s aggressive rate hike policy has done what it’s supposed to do, and that’s slow the economy, not kick it off a cliff.

As a result, he believes there is a 60% to 70% chance of a soft landing. Though that does still leave a 30% to 40% chance of a hard landing.

What Equities Perform Well During a Recession?

Some stocks perform better than others in a recessionary environment. Consumer discretionary, or cyclical stocks, tend to do well when the economy is growing. Defensive stocks on the other hand, like energy, utility, and consumer staples, do well during recessions.

People might cut back on discretionary spending during a recession, like going on a vacation, buying a boat, or other expensive non-essentials, but they don’t cancel medical subscriptions or forgo cold medicine, band aids, baby care, toothpaste, or other healthcare products. Companies that sell essential services like food and electricity also tend to be insulated from the ups and downs associated with economic cycles.

Canadian dividend stocks are also attractive right now because their valuations are relatively low. The TSX 60 is trading lower than the S&P 500 and provides annual dividends of around four percent. The current dividend yield on the S&P 500 is 1.54%.

The outlook for energy stocks is also bullish thanks to record demand and production cuts from OPEC+.  Many oil and gas stocks have staged a comeback from a weak start to 2023. Crude oil hit a low of $6.57 in May but its been trending higher since then at around $95 per barrel, with analysts predicting it will hit $100 per barrel in the fourth quarter. Analysts at JP Morgan actually see oil hitting $150 per barrel in 2026.

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Inflation remains stubbornly high, interest rates are expected to stay higher for longer, and Canada’s GDP is struggling. If you’re wondering where the best places to invest are during a recession, whether its mild or deep, speak to the trading professionals at Learn-To-Trade.com.

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