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2023 was a challenging year, with a rollercoaster ride of market sentiment to match. Economic indicators and forecasts were often mixed, markets saw significant volatility, and the year both started and ended under the shadow of a potential economic slowdown. That said, many broad market indices showed positive returns and we still saw plenty of opportunities on the table for active investment management.
Both equities and fixed income assets delivered strong returns in early 2023, only to be hit with trouble in the U.S. banking sector. Markets feared contagion, but despite the anxiety at the time, this contagion did not truly materialize over the long-term. Within equity markets and particularly in the U.S., a large portion of the year's returns can be attributed to the so-called "Magnificent Seven", a collection of large cap Technology stocks that rallied on the back of artificial intelligence ("AI") buzz mid-year. In our view, we also saw opportunities over the year in smaller pockets of the U.S. market with reasonable valuations.
Fixed income yields reached decades long highs over the year and despite more recent volatility, particularly in the longer duration space, we maintained an overweight allocation in the asset class throughout the year.
Central banks, including the Bank of Canada ("BOC") and the U.S. Federal Reserve ("the Fed"), doggedly pursued hawkish policy throughout the year in order to curb sticky inflation. Inflation began to slow by the end of the year, however it remains above the target rate for both the BoC and the Fed. We also saw a pause on rate hikes in the later months of the year, which suggests that central banks are starting to see the softening they were waiting on in both inflation and labour markets (which were notably firm over the year). Markets responded well to these central bank pauses, rallying on the news of the most recent Fed rate pause in December and in anticipation for potential rate cuts in the new year.
Geopolitical struggles dominated news cycles and will likely persist in 2024. Global growth began to slow over the fourth quarter and we expect to see that continue into the first half of 2024. It will remain important to closely monitor economic indicators as we go forward into this environment, and we expect to see some ups and downs along the way; however, compared to the forecasts from the start, or even the middle of 2023, a soft landing, albeit bumpy, for Canada and the U.S. is looking more achievable going into 2024.
Looking at 2024
Both equity and fixed income markets rallied at the end of 2023, seeing a reason for bullishness in the possibility of central bank rate cuts rather than rate hikes in 2024. We likewise believe that the Fed's decision to hold rates steady in December, alongside a more optimistic Fed forecast, may indicate that we will see a pivot to cuts from central banks in the second half of 2024. We believe the Fed may cut rates first, perhaps as early as May or June. We believe the BoC may start introducing cuts towards the summer. It would be a challenge to estimate where rate cuts will end for the year, but we believe that central banks will have to cut carefully, being mindful of the potential to stoke asset price reinflation in the housing market, while balancing the economy as a whole. There is little appetite from either the BoC or the Fed to move quickly as backtracking these cuts would be a credibility risk and the potential for a hard landing for the economy remains. While inflation is broadly trending downward, it is still sticky and will remain a key data point for central bank decisioning going forward.
The U.S. economy is expected to continue to outperform other global economies in 2024, though perhaps not to the same degree as it did in the second half of 2023. U.S. growth had already begun to slow in the fourth quarter of 2023, and high interest rates are expected to continue to impact consumption. We anticipate that U.S., and global, growth will continue to slow, seeing a trough in the first half of 2024 with potential improvement in the second half. The end of this year will also see a U.S. presidential election, which could potentially have an impact on tax rates and tariffs, but also the appointment of the chair and vice chair of the Fed in the coming years.
In Canada, we see challenges for 2024 around consumption growth; which, while positive overall, is being buoyed by population growth and is more negative on a per capita basis. Canadian housing markets may also face challenges this year, particularly in Ontario and British Columbia. That said, if the BoC starts pivoting and yields drop from their highs, this will have a positive impact on mortgage rates. This, in addition to the increase in population, should help set a floor for home prices, particularly in the single detached market.
Outside of North America, we continue to see weakness in European markets. In China, much of the world is waiting to see what will happen in property markets and whether a strong government response is incoming.
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