Looking ahead to 2023 the watchword for US investors should be 'recession', says broker Canaccord Genuity (TSX:TSX:CF, LSE:CF).
In a note about investor strategy going into 2023, the broker suggested that marketwatchers should be turning to the challenge of economic growth rather than the current inflation risk and higher interest rate themes of today.
"The Fed is raising rates at a historic speed into a generationally levered system with high inventories and weakening demand," analysts noted.
But they added they continued to believe that risk assets (like company shares) should "bottom in the first half and may see a significant rally in the second half as the Fed realizes it has gone too far with rate hikes in a levered system and changes course earlier than expected."
"We would enter 2023 with a more defensive posture, with an eye on adding risk as the market begins to more fully reflect the likelihood of recession," Canaccord wrote.
Canaccord says it has a "very high level of conviction there should be a recession in 2023" due to three key indicators.
One is the current level of possible yield curve inversions (82.2%), which has historically led to a recession each time.
Secondly, whenever the year-year change in the Conference Board Leading Economic Indicators hits the current level (minus 2.7), the economy is either "in or very close to a recession," they noted.
Thirdly, the Philly Fed Coincident Index measures various labor-related measures for all 50 US states.
"The one-month diffusion shows the majority of states are worse than a month ago, and any negative reading has always been associated with recession," wrote the broker.
"We realize our call for recession has become consensus, but sometimes consensus is right. According to the Philadelphia Federal Reserve, almost 50% of professional forecasters are calling for recession (47%)..," analysts noted.
As a result, Canaccord is lowering its 2023 EPS estimate to $210/share to reflect the lower expectation for year-end 2022.