To my clients:
It was a down week for North American stock markets with the Canadian TSX finishing down 0.1%; the U.S. Dow Jones Index finishing down 0.6%; and the U.S. S&P 500 finishing down 1.5%.
A surprisingly strong 2023 is in the books. While growth stocks did the majority of the heavy lifting in client portfolios last year, dividend payers closed out 2023 with a late spurt also. For the majority of discretionary clients who enjoy a balanced allocation to both styles, the end result was a nice double digit gain in the equity (i.e. stock) portion of their holdings.
So that’s the good news. But what might 2024 bring? Economically, the U.S. continues to walk a tightrope between recessionary and non-recessionary outcomes. I cannot say with confidence on which side the economy might land. But what I can say with greater confidence is that even if the economy were to slide into recession, it is likely to be both mild and short. Simply put, with interest rates at their highest in over 15 years, the Federal Reserve has ample room to lower rates to cushion and stimulate the economy. At present, futures markets are pricing in about 6 rate CUTS in 2024 supported by data releases this week that showed: contracting manufacturing (via an ISM Manufacturing Index reading of 47.4); slowing services (via an ISM Non-Manufacturing reading of 50.6) and mixed employment signals with this morning’s headline U.S. Employment Report showing a healthy 216,000 jobs added in December offset by revisions subtracting 56,000 jobs from the prior two month’s readings. In aggregate, these important Big 3 data releases reveal a slowing economy.
From a stock market perspective, it’s my belief that the most important driver of market returns in 2024 will be earnings growth. 2023 saw markets willing to pay more per dollar of earnings (and hence the good market results), although earnings themselves only grew a marginal 3.1%. 2024 will need to see more robust earnings growth to support commensurate growth in share prices and, encouragingly, market expectations are for 11.1% earnings growth in the coming 12 months.
And, of course, this is a Presidential election year. The continuing political polarization in the U.S. is sure to generate many market-moving headlines as we move toward the November 5th polling date but, as with geopolitical events (think Ukraine and Israel/Gaza), my advice is to ignore these headlines. The best available data suggests elections, like war, just don’t have lasting impact on economic and market trends. In the very short term, sure, there will be market reaction to the occasional election headline. But for all intents and purposes, these are impossible to time and will be offset by equally unpredictable positive headlines.
Overall, I think 2024 will see both economic growth (possibly interrupted by a brief and mild recession) and earnings growth that will support commensurate market (i.e. stock) returns.
That’s it for this week. All the best and a Happy New Year to all!
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
Visit Our Website: www.nickscholte.ca
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