Economic recovery expected to continue amid inflation uncertainty

Despite uncertainty about inflation and interest rates, the economic outlook is one of resilience, says Michael Sager, managing director and head of multi-asset and currency management with CIBC Asset Management. 

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Sager noted that data from December showed U.S. inflation remained elevated, at 3.1% year over year.

“Both on consumer prices and producer prices, some of the recent improvement in inflation data has been halted, and it’s caused the market to have some reflection,” Sager said in an interview on Feb. 21. “As a result, a lot of the rate cuts have been priced out.”

While yields subsequently backed up at that time, Sager noted that the case for bonds has significantly improved over the last couple of years. Yields on 10-year U.S. Treasuries and 10-year Canada bonds look to be “not only consistent with fair value but also relatively attractive returns” compared to the last two years, he said.

“The long-term proposition from fixed income — an eclectic mix of fixed income — is an attractive one,” he said.

On stocks, Sager said he began the year cautiously optimistic. “There were opportunities in the market as long as you focused on attractive fundamentals,” he said. Expectations of market volatility also highlighted the importance of selectivity, he said.

“As part of that selectivity, understanding economic cyclical strength, longer-term valuations, central bank policy expectations and making sure that they were coherent and consistent with data flow were some of the key criteria that we were looking at,” he said.

Today, “Selectivity remains the game.”

The U.S. economy has remained robust, he said, while the economies of Europe, Japan and China have been much weaker, and Canada is positioned somewhere in between.

“The Canadian economic cycle looks quite challenged,” he said, with headwinds such as housing. Longer term, however, “we’re broadly in line with long-term fair value” of Canadian equities.

When it comes to asset allocation, Sager recommended focusing on long-term goals and objectives, and building strategic portfolios designed to deliver outcomes over longer time horizons. Further, he was positive about the traditional balanced portfolio.

“A year or two ago, the narrative was that the traditional balanced portfolio was dead,” Sager said. But the performance of a balanced portfolio has “handily beaten cash.”

“Focus on the long term, focus on goals and objectives, and don’t try to time the market or react to every convulsion in market volatility,” he said.

Addressing the risk of inflation, Sager noted inflation’s uncertain path, and he considered whether markets have overstated the extent to which central banks will ease rates.

“That’s really the interesting question,” he said, as the tight labour market and economic growth both challenge the market’s narrative of monetary policy.

“Is policy quite as tight as the market believes?” Sager asked. “If it is, then inflation will continue to moderate, and three or four [rate] cuts as currently priced is likely what we’ll see from the Fed.”

But if “inflation gets another breath, another life, and it bounces a little bit from here, then the Fed is going to have to think long and hard about its extent of easing.”

Looking ahead, Sager remained cautiously optimistic as green shoots of recovery appear across the global economy.

“The question is, Are those green shoots going to flourish?” he said.

His outlook is one of continued economic strengthening. “That’s the next stage, followed in the second half of this year — we hope and expect — by a recovery, particularly in Canada.”

This article is part of the Advisor To Go program, powered by CIBC Asset Management. It was written without input from the sponsor.