telescope, dawn, skyline, looking to the future

With rising interest rates, poor earnings and a recession already priced into the markets, the new year could present a great buying opportunity for investors.

“Real money is made during down markets,” said Macan Nia, co-chief investment strategist with Manulife Investment Management in Toronto. Nia spoke during the Canadian Institute of Financial Planners’ national conference in Niagara Falls on Tuesday.

Stock market corrections are common, Nia said: since 1980, the S&P 500 index has fallen by 14.3%, on average, in any given calendar year. But the index has been positive 78% of those years with an average return of 10.3%.

And markets have been quite resilient during, or immediately after, difficult times. Amid the global financial crisis in 2008, the S&P 500 registered a calendar year return of -38%. However, in 2009 and 2010, the index posted returns of 23% and 13%, respectively.

Now, leading economic indicators are pointing toward a possible recession in Q1 2023.

“We think that if we get a recession, it will be mild,” Nia said, because strong employment rates and positive consumer spending in the U.S. and Canada could cushion the impact of a recession.

Canada’s unemployment rate was 5.4% in August, having hit its lowest level since 1976 in June. The U.S. unemployment rate in August was even lower at 3.7%.

With rising rates and down markets likely in the months ahead, there is a prime buying opportunity for investors, especially when it comes to fixed income, Nia said.

“With inflation, interest rates going up, it’s been a rough go,” he said, speaking before the Bank of Canada’s decision on Wednesday to raise rates by 75 basis points. “But what has that provided us as fixed-income investors moving forward, especially for new dollars? Higher yield.”

Nia said investment-grade credit has yields between 4% and 5% now, compared with 1.5% at the start of the pandemic.

“It’s been a tough year for bonds [and fixed income]. But I believe that has set up the runway for the next couple of years of great returns,” he said.