TFSA, FHSA and RRSP Contributions
The TFSA contribution limit for 2024 has been increased to $7,000. A Canadian Resident who has never contributed to a TFSA, and was 18 years or older in 2009, will have a cumulative total of $95,000 of contribution room.
The FHSA contribution limit for 2024 remains at $8,000. The lifetime limit on contributions to an FHSA is $40,000. Unlike a TFSA, you only begin accruing FHSA contribution room when the account is open. You can carry forward up to a maximum of $8,000 of unused FHSA contribution room to use in the following year. The deadline to contribute and deduct against your 2024 income is December 31, 2024
The deadline to contribute to your RRSP and claim the deduction on your 2023 income tax filing is February 29, 2024. Your available RRSP contribution room for 2023 can be found on your 2022 Notice of Assessment from the CRA.
Market Update
While 2023 had its ups and downs, it proved to be a year of economic and market resilience. On the economic front, growth has slowed but there have been positive surprises, especially in the U.S. where the consumer has been stronger than elsewhere. The inflation backdrop has meaningfully improved, transitioning from an accelerating rate last year to a decelerating one currently. This led to a better investing experience in 2023 as volatility declined, as it historically does when inflation falls from high levels. Lower inflation and volatility have been welcome developments in the bond market, where returns have been more normal and favorable compared to 2022. Equities have also seen reasonable returns, with some markets performing better than others with the TSX rising 8.1%, Dow Jones Industrial Average rising 13.7% or 10.9% in CAD$ and the S&P500 rising 24.2% or 21.2% in CAD$, driven particularly by large cap technology stocks.
The Federal Reserve, the central bank in the U.S., decided to hold interest rates steady at its most recent meeting in December. During its post-meeting press conference, Chairman Jerome Powell suggested that the Fed has been faced with three big questions over the past few years: how fast to raise rates, how high to raise them, and the timing and size of cuts. While the first two questions were its predominant focus until recently, the question of rate cuts is now coming into view. The Fed’s December meeting revealed that, on average, policy makers expect to cut interest rates by nearly 0.75% in 2024 and expect the pace of inflation to slow to 2.4% (from over 3.0% today) and the unemployment rate to rise modestly, to 4.1% (from 3.7%).
Unlike the Federal Reserve, the Bank of Canada does not provide explicit future rate projections. But investors expect Canada’s central bank to similarly pivot towards interest rate cuts. The market is pricing in close to 1.4% in rate cuts by both the Bank of Canada and the Federal Reserve this year, with the latter expected to cut as early as March and the former as early as April. Despite the market’s expectations, there are reasons to believe that the Bank of Canada may act sooner and more swiftly than its U.S. counterpart, given its earlier start to rate hikes and Canada’s heightened sensitivity to interest rates due to higher household debt and shorter mortgage terms. Moreover, the Canadian economy has shown early signs of strain from the impact of higher rates with more sluggish GDP growth, weaker consumer spending, and dwindling job gains.
The two factors that should ultimately determine the timing and degree of interest rate cuts are inflation and employment trends. Last year saw a steady decline in the pace of inflation in both Canada and the United States, but some pressures remain. One example is the cost of shelter, which makes up the largest weight within the Consumer Price Index in both countries. It includes categories such as rent and mortgage interest costs, both of which have shown few signs of abating, particularly in Canada. Furthermore, the downward trajectory of inflation has started to flatten after a relatively sharp decline through the first half of the past year. December’s U.S. inflation data, released this past week, even showed a modest uptick. We believe that policymakers at the Bank of Canada and the U.S. Federal Reserve will aim to get inflation sustainably under 3.0% before considering any rate cuts.
The Federal Reserve is also focused on employment as part of its dual mandate. While there has been a moderation in job growth, it is hard to argue that the employment backdrop in the U.S. requires any support from the central bank. In our view, a more meaningful deterioration in the U.S. job market may be required before the Fed considers any move to reduce rates.
Investors will remain hyper-focused on inflation and employment trends this year, as they try to gage when central banks may take action and cut interest rates. We foresee this fueling swings in the markets in both directions as investors recalibrate their expectations, similar to what we have seen to start 2024. Nevertheless, this year should mark a notable shift in the environment as central banks transition to a more accommodative policy. That has historically proven to be a more constructive backdrop for investors. We plan to shift our attention to the earnings season and the escalating conflict in the Middle East over the weeks to come.
What’s in store for 2024? Our firm’s investment team believes the combination of high rates and restrictive lending standards is a recipe for a recession, particularly in regions like Canada and Europe where growth figures have been underwhelming. There is the chance the U.S. and other regions avoid a recession, and instead experience a “soft landing”, where growth slows but does not outright decline. In such a scenario, earnings would not decline, but would keep growing, more modestly, and help the equity market generate further gains. Nevertheless, the range of potential outcomes for equities over the next year remains wider than normal. Meanwhile, bond yields are significantly higher than they have been in some time which has re-established their role in portfolios. More specifically, bonds of high-quality issuers such as governments and highly rated companies now offer reasonably attractive levels of income combined with the potential to shield portfolios to some degree from any resurgence in volatility should a recessionary scenario develop.
Our approach to managing portfolios in 2024 will be consistent with this past year: treading more cautiously than normal given the range of potential outcomes discussed above. We expect to remain patient with the equity allocations in our portfolios, believing that the window of vulnerability that lies ahead will prove to be temporary. On the fixed income front, we continue to look for opportunities where appropriate to take advantage of higher yields that are available.
Should you have any questions, please feel free to reach out and please let us know of any anticipated cash needs you may have during the year.