April Highlights
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It has been another eventful month in financial markets, with mixed economic data prints, changing tax regulations, and geopolitical stress dominating headlines. The Canadian budget release has attracted the most attention for Canadian investors. It featured higher government spending and still-elevated deficits, but the most notable announcement was a planned change in the capital gain tax inclusion rate.
All capital gains realized by corporations and trusts are expected to be taxed at an inclusion rate of 67%, while capital gains for individuals in excess of $250,000 are also expected to be taxed at a 67% inclusion rate (up from 50%) as of June 25th.
From a market standpoint, the most influential developments have been on the inflation and interest rate fronts. The U.S. inflation data for March showed that, for the third month in a row, the pace of inflation in the U.S. was no longer easing as it had for the most of last year and in some areas was reaccelerating. The stubbornness of inflation pressures presents a dilemma for the U.S. Federal Reserve, which had earlier expressed growing confidence that it would be able to cut rates at some point this year. Over the past week their tone has changed, with several Fed officials acknowledging a need for patience before taking any action on rates. Consequently, markets expectations have also changed dramatically from anticipating up to seven interest rate cuts in the U.S. just a few months ago, to now expecting as few as one to two. This recalibration has driven bond yields higher (and bond prices lower). We will be following the Fed’s announcement very closely tomorrow.
Meanwhile, the U.S. dollar has rallied against most other major currencies, including the Canadian dollar. There is a growing view that central banks in Canada and other regions may start cutting rates by the summer, while the U.S. may not act until later this year at the earliest. That would lead to a widening of the differences between interest rate levels across the regions, which has traditionally been a driver of currencies.
Key Points
- Global economy on an upswing. The global economy has been rebounding since the start of the year. Much like in the U.S., the possibility of a soft landing for global economies has also been increasingly growing as global trade is improving.
- U.S. still chugging along, perhaps too fast. U.S. job openings have been falling without significantly affecting unemployment, a triumphant feat that is not usually seen.
- Canada economy mixed. Canadian unemployment rose from 5.8% to 6.1%, yet there is more to these numbers than meets the eye. Population growth muddied the results, as population growth exceeded the rate of job creation. Furthermore, the number of self-employed individuals declined, which has a smaller effect on the overall economy. Other economic indicators have been relatively modest, indicating that the BoC may not be in a rush to cut rates.
Economic Outlook
A recession seemed extremely likely in the second half of 2022, and somewhat likely across much of 2023 as higher interest rates took hold. Recession signals only seriously started to reverse heading into 2024. We began to pass the realistic timeframe a recession would unfold, as the resilience of the U.S. economy became undeniable and interest rate cuts came into view. Although a few countries did fall into a technical recession, here are a few main reasons the recession forecast dial changed from expecting a recession to expecting a soft landing:
- Various economic headwinds cleared up throughout 2022 and 2023. Normalized inflation, resolved supply chain issues, a reopened China, and resolved U.S. banking distress slowly cleared up near-term economic uncertainty.
- The U.S. economy performed exceptionally well due to lower sensitivity to changing interest rates, increased propensity to consume, and unexpected fiscal stimulus.
- Many countries enjoyed a surge in migration. This population growth, paired with companies’ increased willingness to retain their employees, supported the labour markets.
While these are all positive developments that have helped drive financial markets higher, we always ensure to balance against potential risks.
Our Strategy
- While we remain optimistic, we are also watchful as some leading economic indicators suggest the possibility of encountering a recession remains. The first Federal Reserve interest rate cut, when it eventually arrives, shouldn’t be perceived as an “all clear” signal for the economy.
- Despite the fact that equity markets have done well since the lows reached in 2022, valuation levels (outside of some of the largest technology stocks in the world) are not necessarily elevated enough to suggest that long-term expectations need to be revisited. Keeping a long-term mindset is as essential as ever.
Our focus continues to remain on holding high-quality companies generating attractive and sustainable dividends for the long term.
“In the 54 years (Charlie Munger and I) have worked together, we have never forgone an
attractive purchase because of the macro or political environment, or the views of other people.
In fact, these subjects never come up when we make decisions.”
― Warren Buffett, Legendary investor and Chairman of Berkshire Hathaway
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As always, we will be happy to answer your questions.
Yours sincerely,
Benoit Legros, B.A.A., CIM, FCSI
Portfolio Manager and Senior Wealth Advisor