Dear Friends,

I hope your week-end was a good one.

It has been a relatively calm and positive start to the year with global equities and bonds behaving reasonably well. The past few weeks have been marked by a heavy dose of corporate earnings, more layoff announcements from the technology sector, and a closely watched update from the Bank of Canada. We address all three below.

The Bank of Canada unveiled its latest policy announcement and largely delivered in-line with most investors’ expectations. It raised its benchmark interest rate for the eighth consecutive time. But, the increase of 0.25% was its smallest move since it began raising interest rates nearly a year ago. More importantly, investors were understandably fixated on the central bank’s future plans and in particular the following statement: “we expect to pause rate hikes while we assess the impacts of the substantial monetary tightening already undertaken.” The debate that is now likely to intensify in the months to come is how long of a pause, and whether the bank is likely to reduce rates at some point later this year which is what the bond market is anticipating. Inflation is indeed moderating, and leading indicators of economic activity are also slowing. Those are prerequisites for policymakers to even consider the easing of financial conditions. But, in our view, it remains premature to anticipate a rate cut. It may take a more pronounced downturn in the economy to convince policymakers that they can turn the page on inflation, and shift their attention exclusively to growth.

The other big focus in recent weeks has been on the fourth quarter earnings season. In absolute terms, the results haven’t been good with earnings declining year over year across many sectors. But, it’s often the results relative to expectations that are more important and on this front they have largely been in-line, helping to explain why the markets haven’t been too disappointed. The forward looking guidance offered by many companies has been predictably soft. After all, nearly everybody seems to be anticipating some kind of recession. That includes the U.S. banks, who all suggested they are preparing for one. Nevertheless, they also offered a dose of optimism, reminding investors that consumers and businesses were in relatively healthy shape to start the year with ample liquidity and deposit balances that were still above average, which should help support consumption, investment, and debt payments.

The technology sector has also been in focus of late. Over the past few months, tens of thousands of layoffs have been announced by some of the world’s most influential technology companies. While headline grabbing, it may not be as meaningful as one would think. First, some of these actions are simply an unwinding of the extreme hiring that took place in recent years, particularly in the wake of the pandemic when demand for anything digital exploded. Moreover, while the broad technology sector makes up a large part of the U.S. and global stock market (more than 20%), its economic impact is far less meaningful. More specifically, the sector represents closer to 5% of U.S. GDP (a measure of the economy) and an even smaller proportion of U.S. employment. In other words, the layoffs, while meaningful in absolute terms, may have a relatively limited impact in the grand scheme of things.

The past few weeks have reinforced some of our convictions for the year ahead: inflation and growth are moderating, and central banks are nearing the end of their tightening campaigns. That is a marked difference from the year ago period, and should foster a more normal backdrop for portfolios in which asset allocation delivers the kind of diversification that was sorely lacking last year.

Should you have any questions, please feel free to reach out.

Have a great week.

Best Regards,

Frank