Happy New Year! I trust that you enjoyed the holiday season and were able to spend some quality time with family and friends. With the new year comes the promise of new opportunities and challenges as we discuss market movements, a dynamic geopolitical landscape and more that will undoubtedly impact your wealth planning and investment strategies.
In retrospect, last year was one of upside surprises as inflation continued its trend downward and equity markets globally experienced an impressive rally compared to what was initially feared at the beginning of the year. This acceleration in equity markets did come near the tail end of the year as the brief blip in inflation we saw in September globally returned to the downward trend markets were hoping for.
As we move into 2024, the direction of interest rates is a key focus, impacted by not just the direction of inflation but by the labour market itself. Jobs data out of the U.S. and Canada on Friday reflected a divergence in the economic outlook for both countries. The Canadian jobs market ended 2023 on a soft note, with employment remaining flat for the month of December (contrary to a consensus expected gain of 15,000 jobs). Canada ended the year with unemployment rate up 0.8% YoY, at 5.8%. Softening employment and GDP data through to the end of 2023 are clear indicators that the Canadian economy has slowed down and looks to be in, or approaching, a formal recession. (RBC Royal Bank) In the U.S., 216,000 jobs were added in the month of December, well above the consensus of 175,000. However this was undermined by a downward revision of 71,000 less jobs added in October and November collectively. The unemployment rate remained steady in the month of December at 3.7% in the U.S, a mild increase of 0.3% from January of last year which suggests some unwinding in the labour market – but not to the degree that was expected. (RBC Royal Bank)
So, what does this mean for rates in both the U.S. and Canada? Looking at the expectations shown in futures markets, both the Bank of Canada and the U.S. Federal Reserve are both expected to start cutting rates no sooner than March. Admittedly they will be doing so for very different reasons, with the expectation being that recessionary pressure forces the Bank of Canada to cut while inflation and wage growth maintaining a consistent decline in the U.S. will be the Fed’s signal. For you the investor, the next several months may be the last good opportunity you have to invest in fixed income that will compensate you with the historically high coupon payments we saw in 2023. Relative to the last 15 years, fixed income investments are currently priced to provide strong upside performance, complimented by equally attractive passive income streams from the interest they pay.
With the expectation that inflation will continue to decline, it certainly appears like 2024 will be the year in which we finally shake off the last vestiges of the pandemic. Unfortunately, geopolitical concerns continue to persist from 2023 – primarily in the Ukraine and Israel. The conflict in Israel in recent weeks has threatened to spill over into the wider Middle East, but for now remains contained. Regrettably a key indicator of risk in the region, oil prices have come down measurable since their peak in October when the conflict began, indicating markets are currently not anticipating this war in Israel to spread.
Another significant event this year that will certainly impact the direction of markets is the U.S. election. Next to the 3rd year of a presidential term (most recently 2023), an election year tends to be one of the best performance years for the S&P500. The index in election years has seen an average return of 7.5% historically since 2022, and a median return of 10.7% or the same period. Given our expectation that the U.S. economy will slow down, but not outright enter recession, U.S. equities should achieve a positive result by the end of 2024 though likely not to the same degree as we saw in 2023.
In the attached Global Insight 2024 Outlook (rbc.com) we discuss the impact of U.S. elections on markets in greater detail, as well as provide our outlook for both Canada and the rest of the world as we walk into 2024 with cautious optimism. I strongly recommend you take the time to read the report in full, as I am certain it will be to your benefit and help you understand our outlook for 2024.
SummaryIt’s a new year but that does not mean that the challenges we faced on December 31, 2023 simply ceased. Inflation has improved dramatically, and the U.S is poised to stick the soft-landing markets had hoped for – though nothing is guaranteed. Here at home, recession will very likely take hold in the first quarter of this year though we anticipate it will be milder than originally feared especially as an expected decline in interest rates provides relief for both consumers and businesses alike. Globally both Asian and European economies continue to struggle to return to growth after facing their own respective challenges in 2023. In sum, cautious optimism remains my recommendation – though a heavier emphasis on optimism as we move forward. For now, a balanced investor should maintain an investment strategy that is allocated 60% equities, 38% fixed income and 2% cash. If you or anyone you know would benefit from having a review of their portfolio and would like to understand the strategies we implement here at RBC Dominion Securities, please Contact Us. |