I was at an investment conference early in November of last year and was having lunch with a fellow portfolio manager and we began comparing notes about the market when he mentioned that he had his portfolio at about 50% cash. This seemed extreme to me – I have never had a 50% cash position for an extended period – so I asked him what his rationale was. He said he had a “bad feeling” that we were about to enter a recession and that this would be bad for stocks. To the end of October, the markets were flat for the year and after a negative year in 2022, investor fatigue was becoming a real factor. I have no idea if his clients were complaining to him but he seemed convinced that he was doing the right thing.

Unfortunately for him, November turned out to be one of the best months for stocks in recent memory. The TSX index was up 7.5% while the US market was up 6.7%. The rally extended to the end of the year and if you were invested – and not in cash – you would have participated. If you had a lot of cash, you would have missed out. I have wondered since then how he handled his high cash position. I can tell you from experience that when a portfolio manager expresses an opinion or establishes a position, one the most difficult things to do is admit you are wrong and change course. Even if he was able to admit his mistake, he would have had to act very quickly to invest the cash in his portfolios. I understand why he did what he did – he was trying to protect his clients. But the end result was his clients likely missed out on a big part of the rise in the market.

The rally from the last two months of 2023 has extended to the first quarter of 2024 so when you see your statements, you will likely be pleased. Here is how I am looking at the last six months and the rest of this year. Last year, stock market returns were back end loaded and it is possible that they are somewhat front end loaded in 2024. That is to say, I think it would be perfectly natural and healthy for a pause in the market. Please don’t interpret this to mean that I am selling or I think the market is going down from here. It could be quite the opposite! While I am thoroughly enjoying this recent runup, I like to be prepared for all types of scenarios. It lets me sleep at night and keeps me sane.

As far as interest rates go, it seems to me that the Bank of Canada is likely going to have to lower rates sooner and more aggressively than the US Federal Reserve. By most measures, the Canadian economy is not performing as well and is more precarious especially when it comes to housing affordability. Unfortunately, our central bank has to balance the economy with inflation expectations. It is difficult for me to believe that inflation is going down in a perfectly straight line and that is likely why they haven’t lowered rates already.

If you have any questions, don’t hesitate to reach out.