• Investors started 2024 with optimism that interest rates cuts from the Federal Reserve and Bank of Canada were imminent, boosting sentiment.
• A run of healthy economic data in the U.S. and persistent inflation in Canada have caused investors to re-evaluate the need for rate cuts in the near term.
• As rate cut expectations get pushed out, markets may wobble a bit, a trend we have seen play out often in U.S. election years.
• We would rather have a growing economy with delayed rate cuts than a challenged one with many rate cuts.
• The former presents a short-term speed bump, but the latter is what bear markets are made of.
• Election years tend to finish strong, and we see any early-year volatility as an opportunity to position portfolios for what we think will be a broadening out in gains as the year goes on.

2023 surprised the naysayers

If one were to take a look back at our commentaries and client conversations from one year ago, the overwhelming consensus was that the U.S. was about to enter recession, with Canada not far behind. As the year went on, it became clear that the U.S. consumer remained resilient and the unemployment rate refused to rise meaningfully, both harbingers of an expanding economy. We recently received the U.S. GDP report for the fourth quarter and hence full year 2023, and the results are rather impressive in the face of persistent recession calls. The 2.5% growth rate well surpassed the 2% average of the past 20 years. Given the returns on the S&P 500 last year, it seems the key to successful investing is similar to Warren Buffett’s advice on marriage – go in with low expectations!

Better economy = less rate cuts

As we entered the new year, markets were pricing in as many as seven interest rate cuts from the Federal Reserve and a bit less in Canada. The timing of the first rate cut was seen as early as March in the U.S. and April in Canada, but both of these have been pushed out as the resilience of the economy in the U.S. and a recent uptick in Canadian inflation have made central banks more reticent to cut rates.

Central bankers happy to have some dry powder

After all, with central bankers dealing with ultra-low interest rates for the past 15 years, they are likely glad to have room to cut rates meaningfully should the need arise, and they probably don’t want to lose that optionality. It is worth noting that the last time the U.S. economy achieved a “soft landing” we only received 0.75% of interest rate cuts. While the delayed start to policy easing may cause markets to wobble in the near term, we would much rather have a growing economy and higher interest rates than a contracting economy and much lower interest rates!

Choppy first half typical of U.S. election years, with gains to follow

Interestingly enough, a bumpy first half of the year is the pattern typically seen in U.S. election years, as uncertainty is at its highest in the opening months of the primary election season. Confidence in the eventual combatants and election outcome build as the year goes on, reducing uncertainty and typically driving gains in stocks.

While it is early days, we wouldn’t be surprised to see this pattern rhyme if not exactly repeat in 2024 as investors navigate the end to the central bank rate hiking cycle along with an election that is bound to bring many twists and turns. With the current stark bifurcation in valuations between mega cap technology stocks and nearly everything else, any volatility that comes our way should bring opportunities to position portfolios for what we think will be an eventual broadening out of market gains as the year goes on.

 

 

The Harbour Group

416-842-2300

Putting you first, every time, to help you navigate the complexities of managing your wealth. All of our team members, all of our resources, all of our collective insight: ALL FOR ONE: YOU™.

---

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 its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option thereon. Mutual funds are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member CIPF. ®Registered Trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. ©Copyright 2019. All rights reserved.