DIARY OF A PORTFOLIO MANAGER

April 23, 2024

Billy, Billy don't you lose my number
'Cause you're not anywhere that I can find you
Oh now Billy, Billy don't you lose my number
'Cause you're not anywhere that I can find you, oh no”

–Don’t Lose My Number, Phil Collins

Good day,

Budget News

I will be gathering info from various RBC sources and sending that separately.

New Contact Number

I have new phone number that may be of interest to some of you. 343-961-3820. This to replace the cellular number that you may have. Note that my office number is the preferred number to reach me and that number (613-566-4582) has not changed. If I am not in the office, someone will answer my phone. If cell phone or text is preferred, the above number is the correct one to use going forward so please update your contacts accordingly.

Kim’s number is 613-566-2032 and Evan’s number is 613-566-4625. These have not changed but always good to recap for those that don’t have them handy.

What Else Is New?

Two developments were particularly noteworthy. The first is a significant shift in U.S. interest rate expectations due to recent inflation data. The second concerns heightened geopolitical tensions in the Middle East, following the Iranian and Israeli attacks on each other, which has left investors pondering the potential impacts on financial markets.

Nearly a week ago, Iran launched an attack on Israel using hundreds of drones and missiles, reportedly in response to an Israeli strike in Syria earlier this month that killed several members of Iran’s armed forces. While Israel successfully defended itself against the attack, it represented a notable escalation in tensions as it was the first direct attack by Iran on Israeli soil. More recently, Israel has reportedly retaliated with an attempted strike that appears to be confined to military targets in Iran. Oil prices, which tend to reflect the region’s geopolitical risk most closely, have not surprisingly been volatile over the past few weeks as investors try to gauge the severity of this escalation and the risk of further destabilization in the region.

From a market standpoint, the more influential developments have been on the inflation and interest rate fronts. The U.S. inflation data for March showed that, for a third month in a row, the pace of inflation in the U.S. was no longer easing as it had for the most of last year, and in some areas was reaccelerating. The stubbornness of inflation pressures presents a dilemma for the U.S. Federal Reserve, which had earlier expressed growing confidence that it would be able to cut rates at some point this year.

Over the past week, the tone has changed, with a number of Fed officials acknowledging a need for patience before taking any action on rates (which is what I have been saying for a while to anyone that will listen). Consequently, markets expectations have also changed dramatically from anticipating up to seven interest rate cuts in the U.S. just a few months ago, to now expecting as few as one to two. This recalibration has driven bond yields higher (and bond prices lower), while stock markets have also trended downward recently, albeit relatively calmly, as investors grapple with the prospect of prolonged higher rates potentially affecting growth and corporate earnings.

Obviously, I haven’t been terribly surprised by the shift in interest rate expectations described above. And I’m not convinced it fundamentally alters the investment outlook. Your wealth management team’s approach continues to lean on a few high-level views. First, higher bond yields have improved the return potential for bonds, providing us with a more useful tool for some of our client portfolios. Second, we believe equities face a range of outcomes over the next few years that is a bit wider than normal, stemming from the rapid series of interest rates hikes over the last few years. That said, it’s clear that the U.S. economy has demonstrated less sensitivity to interest rate increases than other regions thus far, supporting its equity market.

Nevertheless, we are managing our asset allocation positioning more carefully than usual given the macroeconomic backdrop. Should you have any questions, please feel free to reach out.

Have yourself a great week,