We hope you had a great break over the holidays and are weathering the first blast of winter we have seen this year.
At the start of 2023, economic and market forecasters were negative in anticipation of a potential recession. In addition, fears that inflation would remain sticky and interest rates would stay elevated for a prolonged period weighed on the economy and market returns. As the year went on signs that inflation was easing led to a positive first two quarters of the year. The third quarter had a few scares as investors fretted that central banks would have to raise rates further to combat inflation. That came to an end in the fourth quarter when inflation subsided enough for the U.S. Federal Reserve (the “Fed”) to indicate that they will likely cut the overnight interest rate three times in 2024. This came as a relief to markets which had seen strong results the last few months and most asset classes posted solid numbers for the year.
When we look at 2024, we are optimistic investment accounts could see positive returns for a number of reasons. First, inflation continues to trend lower. Second, fixed income investments did well in 2023 but could potentially improve in 2024 as longer term interest rates fall while inflation continues to moderate. Remember, bond prices move inverse to interest rates. In 2022, bonds fell when interest rates rose very quickly – the opposite is likely to happen this year as rates fall with inflation and bond holders are rewarded for their patience.
Equity markets will likely not post the types of returns that that they did last year but we believe they can still be solid. In the first eight months of last year the equity markets were dominated by money flowing to the “magnificent seven,” – a name coined for the mega cap tech names like Microsoft, Apple, Amazon, etc. Those seven names now make up over 30% of the weight of the S&P 500. Since markets started moving higher in November, we have seen far greater participation in the other 493 names on the S&P 500. This is a positive sign of where markets will likely go in 2024.
Looking at Canada, energy had a difficult year as recession fears dominated the space. Energy companies are making good money at current commodity prices, but energy companies globally are starting to produce more, including U.S. producers which are already back to record output. The banks had a poor year as fears of high debt levels and interest rates have many concerned that their businesses will have difficulty growing. While much of the bad news is likely priced in already, we do not see great opportunities domestically and continue to allocate money globally.
The fears of recession that were being expressed at the start of 2023 have shifted to the likelihood of a soft landing in the U.S., but we think a shallow recession is possible in Canada. There are still risks to our outlook. With the geopolitical events currently taking place there will likely be volatility. Inflation could end up being stickier and the Fed could potentially cut rates slower than the market currently expects. There are always risks in the investment world. By having a diversified investment portfolio with different management styes and asset classes, we can work through those events.
In summary, we expect this year will be a positive one but there will likely be volatility as we see every year. If you have any questions or would like to discuss your personal circumstances, please let us know.
All the best for 2024!
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