Happy New Year!
We hope you had a wonderful holiday season and enjoyed your time with family and friends.
Before we get started, just a reminder to all that we have Victor Lu on our team, and he is now officially fully licensed as an Investment Advisor. More importantly, he is by trade a Chartered Accountant and Chartered Financial Analyst. Prior to joining our team, he was one of the top BMO Private Wealth planners in the country for the past seven years. Should you have any investment, tax or planning related questions or concerns, or would like to update your plan, we are pleased to have you contact Victor and our team anytime.
Also, a reminder that we usually look to top up Tax Free Savings Accounts this time of year. The new contribution limit is $7,000. Moreover, RRSP contributions must be in by March 1st. If we may assist in any way, please do not hesitate to contact us.
Markets were finally able to finish strong for the final quarter of 2023 after having bottomed out at the very end of October. As we discussed most of the year, market performance was mostly led by technology and the big seven stocks. Fortunately, we saw the market “breadth” widen into the year end. The all-important Financials and other interest sensitive stocks, as well as small to mid size companies, also begin to take part. The TSX (XIC ETF) ended up about 8.3% on the year and the U.S. Dow (DIA) about 13.7%. The SP500 and Nasdaq did better, given the exposure to the magnificent seven and technology. Bonds (XBB ETF) also finally managed to improve into the year end as the outlook for interest rates moderated, finishing up 2.7% on the year.
In comparison, our All Equity component of Portfolios performed just over 10% and our Balanced Portfolios were at about 6.8% after fees.
Last year, and going into this year, we are in the Green Zone in our long and short-term indicators. The most important factors affecting the stock markets were inflation and interest rates. By all accounts, inflation has slowed its rise and as such, in Canada, we saw rates top out early. The U.S. appears to have followed suit. However, any rate declines will still be tentative and quite data dependent. We are also in a U.S. election year, which has been historically and almost consistently, a strong year for stock markets. These factors (see more below) should see markets do well on the year and analyst consensus seems to confirm that.
Markets have started the year with a small pullback to sideways trading. This is to be expected with the recent runup, but given the positive drivers of potentially declining rates and that we are in a U.S. election year, we do not expect any significant downside in the short or longer term.
The Canadian economy does certainly appear to be weaker than the U.S. and the weakness seems to be becoming more pervasive. As such, we do expect that interest rates may begin to come down earlier in Canada in order to provide a “small” amount of stimulus. The first interest rate cuts may now come as early as late March or April. This will be a relief to those with significant loans and mortgages, and particularly for those coming up for renewals. That being said, we continue to caution, that rates will likely not come down as fast as many have hoped, nor to the levels of just a few years ago. The average interest rate on mortgages over the past seventy-five years is not a whole lot lower that where they are today. Please see the following two charts from BMO Economics for more.
In the U.S., the situation is a little different. Inflation has been somewhat stickier, and the latest jobs numbers and other economic indicators still reflect a stronger economy but one too (along with inflation) that is moderating. The latest numbers on the U.S. service sector and manufacturing are both pointing to weakness and may be stagnating. The stock market bottomed in late October and on the expectation that the US Federal central bank is done with tightening on rates and will also need to begin to make cuts. Therefore, the markets are pricing in these potential cuts to come late in the spring. That may be a little too optimistic and we expect the US Fed to be on the sidelines at least a little longer than markets would like. More importantly, the U.S. Government bond yields have come down off their highs, in anticipation of rates declining. That means that investors are getting comfortable in moving away from the “safety” of the US bonds and US dollar as safe havens. As we have said many times, if the US buck is dropping, stocks go up. Again, for those travelling and need US dollars, it may be a good time to begin buying.
Most importantly is the fact that the Fed and most central banks do seem to be doing yeoman’s work in preventing a deep recession. It is now looking likely that we will see a soft landing if anything as interest rates are indeed expected to begin to decline by mid year. This is good for stocks across the board and again definitely for the financials and small to mid size companies.
This is of course an election year in the U.S. This is typically good for the stock markets as both sides of the aisle look to position themselves positively. It will, of course, be a crazy one as always.
Biden still looks like he is going to lead the Democrats and is probably still the strongest candidate to do so. He will run and fire up his base using the mantra of the problem of the MAGA followers and that Trump had planned or incited the January 6th riots (anniversary tomorrow). The increasing problems, however, for Biden have been the lack of policy on immigration and crime. Here is a quote from Greg Valliere, Chief U.S. Policy Strategist, AGF Investments:
“Biden is hearing this from nervous Democrats, especially big city mayors who cannot cope with the surge of immigrants, and he’s hearing it from his foreign policy team, which worries that legislation providing new funding for Ukraine and Israel has stalled, as Republicans refuse to pass any legislation unless immigration is resolved first.”
Any legislation on closing or restraint on the border, or even sending migrants back, will be seen as weakness by Biden’s supporters, especially the harder left, and that could harm his chances. He will have a fine line to walk.
Trump is still looking like he will have a landslide towards leading the Republicans as his base is energized over court cases and attempts to keep him off the ballot. The Supreme Court will likely strike those attempts down. The Jan 6th issue and the other court cases will of course continue to be a major problem and distraction as will the issue of abortion, especially amongst the middle white class voters. The Republicans did however also learn from the Democrats in the last election, and more importantly after getting smashed in the mid-terms, as to the importance of pre-election ballots and getting the vote out.
It is still anyone’s guess as to what will happen. But it will of course create uncertainty which leads to volatility. But again, markets to tend to go up in these election years.
Geopolitical Factors of course remain an ongoing issue. Funding for Ukraine and Israel are stuck in Congress (as above), and the Ukraine / Russia war remains stalled. Iran is using proxies to cause disruption in the middle east and particularly to shipping in the Red Sea. Our bigger concern, however, is whether there will be an “expansion” of tensions in the middle east. Do Iran and the U.S. get directly involved? Should that happen, the market could indeed move towards risk reduction and go sideways to down. Right now, that does not seem to be the case.
Inflations appears to be moderating and interest rates are expected to come down by mid year globally. A deep recession is probably off the table and, in the worst case, may lead to a soft landing. While that means the economy is weakening, it also means that investors can look ahead six to eighteen months for the economy to improve. We are in a U.S. election year and both sides will do what they can to make it all look positive. Geopolitical concerns are so far somewhat contained. We also look at the consensus across the board from most analysts and institutions, and the outlook is also positive and for markets to end the year higher.
We are fully invested and in the Green Zone. Markets had a nice rise in to the end of the year and as expected (and what often happens in early January), we are currently seeing a bit of a pullback to sideways trading. We expect that to be short lived. The market has changed and has started to move away from the Magnificent Seven and we are seeing a logical and needed expansion of breadth of participants. As such, we are adding more to financials, small to mid size companies and also health care and other interest rate sensitive stocks. As signs of the market and the economy point to a restoration of health, we also look forward to a strong year.
Should you have any questions or concerns, or would like to meet in office or virtually, please contact us anytime.
Best regards,
- John