Client Letter Q1 2024
2024 starts off with a bang!
Global markets stormed out of the gate in the first few months of 2024. The combination of a resilient consumer base and lower inflation levels created a positive backdrop for investor optimism. The S&P 500, S&P/TSX Composite, and the MSCI World Index were up 10.2%, 5.8%, and 8.4%, respectively, in the first three months of the year. Bonds showed up to the party late—Canadian and U.S. bonds (measured by the FTSE Canada Universe Bond Index and Bloomberg US Aggregate Bond Index) were down 1.2% and 0.8%.[1]
Here's a deeper look at the factors at play to start the year:
Global economy.
The global economy continued to slow but has remained resilient. Excess savings accumulated by consumers during the pandemic, along with a robust job market, have provided a buffer against some economic difficulties. With interest rates above their short-term levels, it’s expected that the global economy will continue to slow. While there is debate over whether Canada and the U.S. will enter a recession in 2024, these economies are likely to at least experience a slowdown in growth.
Equities.
Company profits were one factor supporting equity returns. U.S. companies saw a solid profit growth of nearly 8% in the recent quarter, as measured by the S&P 500 Index. In contrast, Canadian companies faced challenges with a decline of nearly 9%, as measured by the S&P/TSX Index. This difference in profit profile helps explain the performance gap between these two indices. Markets often respond to immediate events and news. Looking ahead in the near term, a lack of significant developments may lead to a pause or modest correction. However, the longer-term environment remains optimistic.
Inflation and interest rates.
Inflation peaked in the summer of 2022 at 8.1% in Canada and 9.1% in the U.S. Since then, it’s fallen to 2.8% and 3.2% as of this past February. As a result, the Bank of Canada and the Federal Reserve have likely paused their interest rate increases. Investors are anticipating a shift towards rate cuts in 2024, with expectations of around three cuts of 0.25% each. While these predictions are likely to change based on economic conditions, it’s much more certain that any cuts will likely occur in the second half of the year.
We believe that equities are “priced for perfection” with markets expecting to avoid a recession, a gradual decline in inflation, and central banks cutting interest rates. In this environment, any headline surprises that state otherwise may create potential choppy markets in the near term, but that could create opportunities for selecting individual stocks that outperform.
The biggest hurdle to making money in the markets is the ability to stomach the roller coaster ride.
As always, if you have any questions about the markets or your investments, I'm here to talk.
Regards,
[1] Bloomberg, as of March 31, 2024