It seems as though gambling is everywhere and on the rise in many societies. Lottery commercials are frequently advertised on TV and, now, online sports betting is legal in many places. These betting companies have been advertising using athletes as their TV pitchmen. Sports broadcasts often have a new “desk” of commentators who talk about the betting odds of various games. Parts of the financial markets are not immune to this trend, with low- cost online trading options encouraging people to trade. I’m sure that the most popular technology stocks are likely full of shareholders that chase upside price momentum and know little about the company itself. Bitcoin is likely full of speculative gambling traders as well. History shows that this will end in tears at some point.
Western economies are enjoying a period of easy monetary conditions, despite higher interest rates. Money supply remains ample and, although the U.S. central bank reduced it in 2022, the supply remained steady in 2023, despite stronger than expected economic growth that remains thus far in 2024. The pandemic lockdown accelerated some technological practices such as the ability to work from home. It seems that more of these practices are still to come, as Artificial Intelligence (AI) is increasingly adopted. Redundant clerical tasks are likely to be replaced by machines. This, like any other labour disruption, as seen in previous industrial revolutions, will be societally bumpy and painful for some.
I remain perplexed on why the U.S. Federal Reserve (the Fed) indicated in December that three interest rate cuts were possible in 2024. These comments released traders’ animal spirts, and triggered the rally in stocks that continues today.
The U.S. economy has remained more resilient than expected in 2024, thus likely delaying future interest rate reductions. Traders were pricing in as many as six interest rate cuts this year, which seems unlikely at this point. Regardless of this setback for market exuberance, the stock market remains strong. Things remain in motion longer than you think they will, and stock markets are no different.
U.S. shorter term interest rates are higher than longer term interest rates. Inverted yield curves usually predict an upcoming recession. Despite the stock market’s excitement, an economic slowdown remains possible later in 2024 or in 2025. If the U.S. central bank delays interest rate cuts, and/or reduces the money supply further, the risk of such a slowdown will only increase. Meanwhile, Western governments continue to spend and borrow creating budget deficits. If, at some point, this government spending and borrowing pushes inflation higher again, interest rates will need to rise in response. No wonder gold, sometimes called “the currency of last resort,” is hitting new high levels.
We continue to believe that inflation will remain sticky, perhaps with an upward bias over the next several years. Western governments are spending and borrowing, which at some point, may push buyers of bonds to demand higher interest rates. Further, the U.S. is in “made in America” mode, regardless of who wins the election in November. This reduction of free trade will be inflationary.
As mentioned, stock markets are near all- time high levels as investors scramble to get on board due to fear they are missing out. We remain fully invested, focusing on companies with strong fundamentals and resilient business models. As always, we at Pringle Portfolio Management will do our best to protect your interests.
Tony Pringle, CFA
March 31, 2024
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The strategies and advice in this report are provided for general guidance. Readers should consult their own Investment Advisor when planning to implement a strategy. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © 2024 RBC Dominion Securities Inc. All rights reserved.