Last week, our team hosted our annual webinar, which was titled: 2024 Investment Outlook – An Immaculate Recovery?  The presenter was our Senior Portfolio Manager, Richard So. In his message, Richard weighed the prospects for the recovery to continue. Below are some notes from the ‘macro’ segment of the presentation.

Has the Recovery Started?

- There is the temptation to believe that “Stocks went up a lot… so it’s probably coming down.”

- Bears are still expecting something to break in the economy. However, the argument can be made that plenty of things have already “broken” evidenced by: 1) a mini US banking crisis, 2) a recession in commercial real estate, 3) record low consumer sentiment 4) a earnings recession that lasted three quarters 5) a collapse in the bond market 6) a 2022 bear market & “Tech Wreck”, and 7) a severe downward rerating in unprofitable and speculative investments. In all, the market has not come out of this unscathed

- Pessimism and skepticism has led to an increase of $1 Trillion in money market funds, despite the stock market rising in 2023.

- Investor skepticism is understandable. We are currently in a messy post-crisis normalization phase where investors are fearful of tipping back lower. This fear of a “double-dip” was similarly seen after the great financial crisis and the Tech bubble/911 downturns. Ultimately, markets remained resilient, and the recovery was believed.

- Markets are starting to accept that we are headed towards an economic soft landing, however, perhaps too much “good news and expectations” are already priced in. (12%+ earnings growth, ultra low bond spreads, complacent levels of equity volatility (VIX) and market expectations for 4-6 rate cuts)

- We should not dismiss the cracks that can lead to volatility (unemployment rising in Canada, margins falling, credit card delinquincies, savings rates at lows, pullback/normalizing spending)

- It is reasonable to be cautious. Investors do not need to “chase” momentum if they are already at their long term equity allocation targets.  On average, markets experience a 10% pullback at least once a year. For 2024, the reason for such pullbacks may include: sticky inflation, a delay in rate cuts, potential election and geo-political flare-ups and weaker economic data.

- Conclusion: The Recovery is likely underway, but pullbacks should be expected as investors are historically more ‘jittery’ immediately after a bear market.  Attempting to trade in and out of the market to avoid pullbacks will be difficult.  Rather, investors should be patient and only adjust their equity exposure if a deterioration in fundamental is witnessed.

Key Fundamentals to Track

Currently, the following fundamentals appear to be pointing to continued economic resilience and a market recovery. Until the data begins to trend unfavorably, investors should refrain from aggressively derisking.

1) Recession Risk: The National Bureau of Economic Research (NBER) is the organization that officially declares recession and the totality of their indicators appears far from being able to call a recession.

2) Inflation: Central banks have made significant progress on inflation. The key inflation metric of Core PCE reported an annual rate of 2.90%,  6 month annualized rate of 1.90% and a 3 Month annualized rate of 1.50%. The Fed has acknowledged the risk of overtightening economy. The decision to not cut rates while inflation is falling would effectively result in a further tightening of the economy. Hence, even if the goal was to maintain the current pressure, the Fed needs to cut rates at the pace in which inflation falls.

3) Labour Market: The Fed has tried to cool the labour market, but it has remained resilient with 23 straight months of unemployment below 4%.  With wage growth above the rate of inflation, the consumer’s ability to withstand high prices and continue spending is extended.

4) Consumer Health: Household debt levels are nowhere near financial crisis levels and remain reasonable.

5) Corporate Health: Most companies are still benefiting from the era of low rates as many locked in their debt at low interest rates. The push towards onshore manufacturing, the need to rebuild inventories and a multi-year period of underinvestment may lead to a new capex cycle.

6) Liquidity: $6 trillion dollars in money market funds to help fuel “dip buying”.

Richard used a metaphor to compare investing with the sport of fishing. Attempting to trade in-and-out to avoid what he believes will be only temporary pullbacks is akin to the sport of fly-fishing where one repeatedly casts their line forward and backwards to mimic a flying insect to catch a fish. The technique is difficult to master and the line can often get tangled leading to a frustrating experience. Investing in this manner is ill advised if we are ultimately on the path of recovery. Rather, Richard believes that we are in a moment where one should simply leave their line in the water, be patient and watch the fundamentals mentioned above for any cues for further action.

It is beyond the scope of this blog to review all the micro and action plan items that followed the macro segment of the presentation. Below, we have highlighted the main topics discussed. If you would like to learn more and review the myriad of charts and information provided, reach out to an advisor from our team.

Will Canada ever outperform the US?

Is it Too Early to Buy Bank stocks?

Has Technology and Mag 7 stocks gone up too high-too fast?

Is the bull market in Oil over?

What type of bonds will outperform GICs?

What sectors to over and underweight to start this year?