What Will 2024 Bring?
After a pretty rough 2022, 2023 was an improvement for both the equity and bond markets. In 2023, the S&P 500 was up 24.2%. Here in Canada, the S&P/TSX Composite was up 8.1% and the Bloomberg Global Aggregated Bond index was up 5.7% (in USD). Let’s just say 2022 was way worse than 2023. So, what do we think it means for 2024? We’ll answer in three parts.
Bonds
This is a turnaround story. For 40 years, from 1982 to 2022, interest rates declined. In a declining interest rate environment, bond values go up. That party came to a close in 2022 when rates effectively went to zero. At that time, we actively diversified away from bonds given that, at that inflection point, rates were going up causing the opposite effect of bonds going down. Structured notes for that two-year period filled in the gap and continue to do so. We are again in a declining rate environment which is good for bond investors, so we are migrating some assets back into bonds. We will continue to do this through 2024.
Canadian Equities
This is not as strong a story. Fundamentally, the Canadian situation is very different than the U.S. Very worrisome is the level of both personal and corporate debt. The personal debt to disposable income ratio stands at a staggering 187%. This compares to 100% in the U.S. who have been much better at saving. Our unemployment rate is also over 50% higher than the U.S.
More importantly, in Canada we really only have three sectors: energy (oil and gas), materials (mining and lumber) and financials. All three sectors are very highly correlated. We don’t really have any tech sector, healthcare, or industrials. According to a recent study by Vanguard, Canadian investors have a very high “home bias” meaning that the average Canadian investor has 52% of their equity investments in Canada. By comparison, Canada only represents 2.5% of total global equity market capitalization. The U.S. is 42.5%. By comparison, Canada is closer to the market cap size of another resource-based economy, Australia. We doubt very much whether anyone would invest over half of their equity investments into Australia.
U.S. Equities
First, keep in mind that 2024 is an election year. According to Morningstar, the average return in election years since 1928 is 11.28%. Positive performance in 19 of 23 elections.
Although there is potential for a recession in 2024, it seems more likely that there will be a “soft landing” which essentially means no recession.
U.S. unemployment is 3.7% relative to the long-term average of 5.3%. People who want a job have one and are spending money to support the economy. Interest rate increases have peaked, and we expect them to come down throughout 2024. This is all good.
The sectors we particularly like in the U.S. are the financials, tech, healthcare, and industrials. As a result of all this, we will continue overweight the U.S. in portfolios.
One Final Point
You may also be asking yourself “What happens if the Orange man gets elected south of the border?” There are two points to be made here. Equity markets don’t care who is in power. It is all driven by market and economic conditions. Having said that, historically, as noted above, the average return is 11.28% BUT in those years a Democrat was elected it’s 7.6% and for the Republicans it’s 15.3%.
The themes mentioned above are those we intend to follow in the coming year. If you would like to talk more about it, we are always here for a call.
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