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Canaccord Genuity says it has a “high level of conviction” that US economy will sink into recession in 2023 based on the performance of the yield curve and certain economic indicators, like the Conference Board Leading Economic Indicators and the Philadelphia Fed State Coincident Index.
As a result, Canaccord advised its clients to focus more on economic growth rather than inflation and rising rates. The firm added that it sees risk assets bottoming during the first half of 2023, with a significant rally possible in the second half if the Fed realizes its rate hikes were too aggressive and changes course.
“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 added.
In making its assessment, the investment bank pointed out that the current level of yield curve inversions indicates that a recession is on the horizon. It added that a high reading “can happen well before an economic downturn, but is a sign that one is coming.”
Canaccord also noted that the year-year change in the Conference Board Leading Economic Indicators of -2.7 is also a warning, as similar readings have also been historically linked to recession.
The Philadelphia Fed State Coincident Index, which measures labor-related activity, has likewise dipped, yet another indication that the economy is not headed for a “soft landing.”
In related news, Wells Fargo has set a modest target of 4,200 for the S&P 500 in 2023.
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