We hope you had a great Easter long weekend and had a chance to unwind with friends and family.

The first quarter is now behind us and what a first quarter it was for equity markets. The fears of recession that we have been living with the last couple of years are fading into the background as the global economy continues to perform better than many expected as inflation continues to soften. The expectation is that inflation will need more time to get to the 2% level that central banks are aiming for, but it is moving in the right direction.

Equity markets were strong as market breadth continued to expand from the fourth quarter. 2023 saw the magnificent seven lead the markets higher for the first eight months of the year, before we saw many other companies and sectors join the rally in November as the fear trade eased. That rally has continued as markets are starting to price in earnings growth for more than just the magnificent seven. This year only five of the magnificent seven have performed well to start the year as other names are attracting capital.

U.S. markets continued to lead global markets higher, but we have seen most equity markets around the world trading at record highs and many commodities are joining in too. Canadian markets had a solid first quarter gaining over 5%, being led by energy stocks as West Texas Intermediate rose with geopolitical uncertainties. Crypto currencies also had a strong first quarter. The SEC in the U.S. finally approved spot Bitcoin ETFs in January which offered up a new way for investors to get exposure to the emerging asset class.  It has been a difficult place for us to get comfortable allocating capital to, but major institutions are now allocating to the area and it is becoming more mainstream even though it is still high risk. It can be uncomfortable when markets trade to new highs but we are confident that the new highs are justified by the expectation that earnings will rise from the sluggish economy of the last couple of years. Equity markets are at new highs but aren’t much higher than they were at the start of 2022.  The S&P 500 Index is less than 10% higher than it was at that time.  The S&P/TSX Composite Index is within 1% of the highs that it previously set in March of 2022.  The point is that the markets may be at a new high but they haven’t done a lot in the last couple of years so there is likely more room to grow as capital gets put back to work.

One of the triggers for this strong rally was the U.S. Federal Reserve indicating they would likely cut rates three times in 2024 depending on how inflation data played out. The market initially priced in an expectation for six cuts and now it has tempered expectations to 2-3 cuts for this year. 10-year interest rates in the U.S. have actually moved up about 40 basis points this year. That has reduced the returns for most fixed income instruments in the short term but because yields are much higher than we’ve seen in the last fifteen years, we have seen a positive total return for most of the bond portfolios we hold. We still expect rates to decline as the year progresses as inflation continues to subside. When that does happen, we expect to see the price of bonds rally and could see high single to low double digit returns for bond portfolios for the year.

As we look forward, we believe that the markets have more upside for this year but we continue to expect volatility. With the strong first quarter we may have a softer start to the second quarter as we digest the gains that have taken place in the last two quarters. The fears of recession the last few years have been unfounded and the animal spirits of the markets have been reawakened.  With the top ten companies in the S&P 500 making up over 30% of the index’s value, we continue to like the remaining 490 names as representing good value. We still like some of the mega cap names we hold and have been looking to trim some of the profits from them.

We look forward to inflation continuing to decline and interest rates falling in the second half of the year. We will continue to make adjustments to stay exposed to the strongest areas of the market and attempt to avoid the weakest parts.

If you have any questions or would like to speak to any of us, please let us know.

We wish you all the best for a healthy and happy Spring!


Mike & Craig


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