2024 Market Outlook: The Year Ahead

Fundamentals matter as market broadens out

Between rising geopolitical tensions in Europe and Asia, the growing threat of climate change and the coming elections that will see almost half of the global population heading to the polls, it’s understandable that some investors are on edge. But if that sounds like you, then take another look at what’s happening in the markets, said Brian Belski, Chief Investment Strategist at BMO Capital Markets. As he points out, the market is far more attractive than many investors appreciate.

That was one of the many takeaways from the recent 2024 Market Outlook event hosted by BMO Private Wealth. In addition to Belski explaining where he sees opportunities, attendees had a chance to hear the latest updates on the economy from BMO Capital Markets Senior Economist Jennifer Lee, and learned how to incorporate investment ideas into their asset allocation from Brent Joyce, Chief Investment Strategist, BMO Private Investment Counsel.

Interest rates issues persist

Investors need to pay attention to the strength of the U.S. economy, which continues to be resilient across all categories. “It is amazing that after over 500 basis points in rate hikes, we have yet to see a slowdown in the U.S. economy so far,” said Lee. “The whole soft-landing narrative is still definitely a possibility.”

Canada is in a slightly different position, she explained, given the country is more sensitive to interest rates because of the impact they have on the housing market and trade. “You’re likely not going to officially see a recession – it might feel like it – but we’ll definitely see slower growth,” she said.

The last mile of getting inflation back down to 2% is proving to be the biggest challenge for central banks on both sides of the border. While markets are pricing in a rate cut in the U.S. as early as March, Lee doesn’t expect the Bank of Canada to lower rates until June, with the U.S. Federal Reserve following in July. Although, she cautions, that could still change. “Everything is data dependent,” she explained.

External factors like geopolitics and climate change could also influence the data. Already, growing tensions in the Middle East are causing shippers to avoid the Red Sea by taking the longer and more expensive route around Africa, while changing water levels are making it harder to move goods in other parts of the world. All these things have an inflationary impact, noted Lee.

Bonds providing safety

Investors who were turned off by the bond rout in 2022 – the worst year for fixed income in Canada in 30 years – may want to take another look at the asset class. Just as stock markets rebounded after a bad patch, bond markets can also recover, said Joyce, reminding the crowd that bonds rallied to return 6.7% in 2023.

“It has been a big surprise to many folks,” he said. With interest rates normalizing, Joyce thinks the Canadian bond market could return about 4% this year, with corporate and high-yield bonds in the U.S. perhaps inching closer to 5%. “If nothing changes, then you can look up what the yield to maturity is on your bond, and in 12 months, that’s going to be your rate of return,” he said. “That’s not forecast or opinion, that’s mathematics.”

That means investors can once again look to bonds to help manage volatility and risk. “The bond market is set up now to provide us with the safety that we come to rely on should things go awry,” noted Joyce.

Strong year for equities

While there is much talk about what’s happening in the U.S. economy and markets, particularly around the so-called Magnificent Seven stocks (Apple, Microsoft, Google parent Alphabet, Amazon.com, NVIDIA, Meta Platforms and Tesla), Belski cautioned against being married to a narrow view of the market.

While those stocks have accounted for much of the return on the major indices lately, Belski doesn’t think that trend will continue. “This year is not about being in the Magnificent Seven,” he said. Instead, he expects to see a broadening out of American indices, with a greater number of companies contributing to the market performance. He added that Canada will benefit from this as well.

There is evidence that the broadening out is already underway. As Belski pointed out, some might be surprised to hear that Canada’s technology sector outperformed the U.S.’s technology sector through most of 2023, a pattern that has carried over this year so far.

Joyce and Belski share a similar view of the market. For Canada, Joyce sees the S&P/TSX Composite rising to 23,500, which he noted is an even greater percentage gain than what he’s expecting for the U.S, which is why BMO is overweight U.S. and Canada. “We certainly think that we can make money in the equity market,” he said. “That’s going to be a bit more normalized returns, which would be in the 8% to 12% range, than the big swoons and big recovery that we had last year.”

Although Canada underperformed the U.S. last year, Belski encouraged the audience to look for opportunities in their backyard. “Canada is an amazing market with respect to value and cyclicality,” he said. “We believe Canada in local currency standpoint, is going to outperform the United States this year.”

 

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