Global equity and bond markets are finishing 2023 on a strong note. This strength can be attributed primarily to two factors. First, inflation continues to show signs of moderating, raising expectations that central banks are at the end of their rate hiking cycles. Second, while growth has slowed – in some regions and sectors more than others – economies have generally handled the challenges better than expected. Below, we step back and briefly review 2023. We also look ahead to 2024 and profile our firm’s flagship investment publication, The Global Insight 2024 Outlook.
While 2023 had its ups and downs, it has proven to be a year of economic and market resilience. Economic growth has slowed, but there have been positive surprises, especially in the U.S. where the consumer has been stronger than elsewhere. Inflation has meaningfully improved, transitioning from an accelerating rate last year to a decelerating rate today. Investment volatility declined this year, 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 favourable than last year. Equities have also seen reasonable returns, with some markets performing better than others, driven particularly by large cap technology stocks. It is worth noting that the breadth of stock market gains improved towards the year’s end, suggesting that more stocks have been participating in the recent rally.
What is in store for 2024? We believe that the combination of high rates and restrictive lending standards will produce recessions, particularly in Canada and Europe where growth figures have been very weak. The U.S. and other regions may avoid a recession, and instead experience a “soft landing”, where growth slows but does not decline. In such a scenario, earnings would not decline, but would keep growing modestly and enable the equity market to generate further gains.
The range of potential outcomes for equities over the next year remains wider than normal. Bond yields are significantly higher than they have been in some time, which has increased the supportive role of bonds in portfolios. Bonds of high-quality issuers such as governments and highly rated companies offer reasonably attractive levels of income combined with the potential to shield portfolios to some degree from any resurgence in volatility should a recession 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 lying ahead will prove to be temporary. For fixed income, we continue to look for opportunities where appropriate to take advantage of the higher yields that are available.
We extend our warmest wishes to you and your loved ones through the holiday season. We wish you all the best for the upcoming year.
If you have any questions, please do not hesitate to contact us.