Canada’s benchmark index closed higher Friday but it wasn’t enough to pull the S&P/TSX Composite Index out of a weekly loss as the heavyweight financial subsector buckled under souring investor sentiment.

The Canadian benchmark index closed 65.39 points higher, or 0.36 per cent, on Friday at 18,394.45. It posted a 3.30 per cent loss for the week overall.

While the TSX financial subsector was higher on the day Friday, Canadian bank stocks are in bear market territory over concern about how they’ll be impacted by a possible economic downturn.

No longer a question if we go into a recession but 'when' and 'how severe': Wealth advisor

Diana Orlic, wealth advisor and portfolio manager of Orlic Harding Cooke Wealth Management Group at Richardson Wealth Limited, joins BNN Bloomberg to talk about Canadian banks stocks declining and the possibility of a recession. She believes that the market volatility will continue this year.

“I do think that the Canadian financial sector is starting to get volatile as inflation and recession fears start to mount, so the prices and the volatility are just reflecting market reality,” Diana Orlic, wealth advisor and portfolio manager at Orlic Harding Cooke Wealth Management Group at Richardson Wealth Ltd., said in an interview Friday.

Nigel D’Souza, financial services analyst at Veritas Investment Research, said the most important factor investors should watch for with the banks is a possible “uptick in credit losses and credit loss provisions due to rising interest rates.”

Canadian bank stocks could fall another 5-15% before they hit bottom: Nigel D’Souza

Nigel D’Souza, financial services analyst at Veritas Investment Research, tells BNN Bloomberg that as credit risk lags interest rate hikes, banks may not see a peak in credit losses until late 2023 or early 2024, and therefore the true bottom for the sector may be up to two years away. He notes that any decline in economic activity will be negative for the banking sector. His stock picks include BMO (BMO TSX), Canadian Western Bank (CWB TSX) and Manulife (MFC TSX).

“The only question is how high and how severe those [credit] losses could be, but when you factor those in, all that leads to lower earnings and a further downward revision of earnings estimates that would result in likely further downward pressure on share prices,” D’Souza said in an interview Friday.

“So we could see somewhere between five to 15 per cent further declines in the share prices for the [financials] sector before we find a true bottom on a valuation basis.”

D’Souza said he thinks a recession would have a significant impact on Canada’s banking sector “which inherently is a very cyclically-sensitive industry.”

U.S. markets snapped a five-day losing streak to end higher as traders dialed back their bets the U.S. Federal Reserve would deliver a full-point interest rate hike at its next meeting.

The S&P 500 gained 1.92 per cent, the Dow jumped 2.15 per cent and the Nasdaq rose 1.79 per cent on Friday. However, all of the major American indices finished the week in the red. 

Meanehile, investors received more insight on Friday into how Wall Street’s biggest banks have been faring.

Citigroup Inc. shares ended 13.23 per cent higher Friday after being the first U.S. bank to report stronger-than-expected earnings this fiscal quarter thanks to an increase in currencies, commodities and interest-rates trading. So far, Wells Fargo & Co., JPMorgan Chase & Co. and Morgan Stanley have all missed analyst expectations for the quarter. Both Citi and JPMorgan suspended share buybacks to preserve cash during this time economic uncertainty.

Benchmark WTI crude rose US$1.81 to settle at US$97.59 per barrel, marking the first time it ended the week below US$100 since early April. It’s also the second weekly loss for the commodity.

Oil prices have been beaten down by concerns over Chinese economic growth and data showing that high gasoline prices in the U.S. are starting to weigh on demand.

Oil traders had their eye on U.S. President Joe Biden who is on a trip in Saudi Arabia. While there was no official announcement made, the White House said it expects the Saudis to increase oil production after Biden met with kingdom’s rulers.

The Canadian dollar traded half a cent higher against the greenback at 76.80 cents U.S.