Our Two Cents

December 06, 2023 | Rachelle Allen


2024 Outlook - navigating the shifting tides

In the realm of global equity markets, the past two years have been characterized as lackluster. After a meteoric rise from the pandemic lows of 2020, and markets peaking in 2021, global equity markets have been at a standstill over the past couple of years

The artificial intelligence boom at the beginning of 2023 marked by the release of ChatGPT has brought significant gains in the S&P 500 isolated to a handful of technology stocks dubbed the Magnificent 7, (Alphabet, Apple, Nvidia, Microsoft, Tesla, Meta and Amazon). Up until November, the results for the remaining 493 stocks were flat at 1%. During the month of November, the S&P 500 advanced 8.9%, its 18th biggest monthly gain since 1950 with improving market breadth and increasing the return of the other 493 stocks to 4%. Looking at markets outside of the U.S., for example, Canada and Europe have lagged and underperformed the S&P 500.

While global equity markets have stagnated, a new opportunity has emerged with bond yields surging for the first time since 2007. This shift makes bonds increasingly attractive and pivotal in portfolios, marking the return of income in fixed income investments.

The economic landscape has transformed since the Great Financial Crisis of 2008. After a prolonged period of ultra-low interest rates, the world is now adapting to a ‘higher for longer’ environment. The world shut down in 2020 and as the reopening occurred, a new economy emerged, consisting of high inflation and higher interest rates. We now must learn how to exist in the ‘higher for longer’ environment. We say higher rates, however, interest rates are now back at the 50-year average. One could argue the period of ultra-low rates from 2009 to 2021 was in fact, an abnormal period of history.

Source: Joe Peters Real Estate

It means the stock market has competition. For the past 15 years, bond yields were unusually low and more money flowed into stocks to generate income. Now that interest rates have increased, with potential rate cuts in 2024, the result would be an increase in bond prices. It is quite possible that more cash will flow into bonds than stocks in 2024. With the increased rise in interest rates, investors now have more options and the stock market will adjust.

We can look to November 2023 as an example of the opportunity in bonds. We experienced a sharp decline in interest rate. The 10-year U.S. Treasury yield fell 76 bps to 4.22% (below it October closing high of 4.98%) and 2-year yields fell 63bps (5.19% to 4.56%). This resulted in the Bloomberg US Aggregate Bond Index closing 4.5% higher, its best month since May 1985.

Source: Charlie Bilello

How have higher rates affected the Canadian economy?

The Canadian economy is grappling with the impact of higher rates, leading to a slowdown in consumer spending. Canadian households, more indebted than their U.S. neighbour, are experiencing the effects of higher mortgages, with spending on essential items increasing by nearly 10% in the past year.

What is the silver lining?

The latest Canadian CPI number for October 2023 indicates 3.1%, evidence that inflation is easing. If this trend continues, additional interest rate hikes from the Bank of Canada may not be imminent.

For Canadians with variable rate mortgages, the prospect of no further rate hikes is a relief, especially for those facing mortgage renewals in 2025, 2026 and 2027.

The relationship between global equity markets and the resurgence of interest in bonds paints a dynamic picture of the financial landscape. Navigating these shifting tides requires a nuanced understanding of market trends, a keen eye on global developments and the readiness to seize emerging opportunities.

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