Weekly Newsletter – November 2, 2023 – Looking Forward to 2024!

2023 has been an interesting and volatile year, not only in the bond and equity markets but in general. However, I will focus on the bond and equity markets. Up until July, the TSX was marginally positive for the year, but since then, it has dropped 10%. The selling pressure has come from all subsectors. As the fear of rising interest rates has increased, bond and GIC yields have risen, pushing the prices of equities back down. For example, Canadian banks are now trading at levels not seen since the early 1990s and are, in fact, trading at cheaper valuations than during the credit crisis.

2022 also was not a fabulous year for the bond and equity markets. In the past 45 years, 2022 was the only year when both bonds and equities were negative - stock returns for the S&P 500 and bond returns for the Bloomberg U.S. Aggregate Index. Of the other 44 years, 33 years saw both bonds and equities rise, 8 years represented bond gains and equity losses, and 4 years where stocks gained and bonds lost. So far, 2023 has shown gains in the S&P 500 (though truly only for 7 companies), being positive, but the S&P 500 Equal Weight Index is actually negative for the year. The Bloomberg U.S. Aggregate Bond Index is flat year to date and is down 9% from its high a year ago. Meanwhile, there is $5.6 trillion USD sitting in money market funds.

Will rates continue to rise? Over the past few days, governments globally have provided their quarterly GDP numbers and inflation data. The vast majority of countries are showing a significant slowing of growth and inflation. The outlier seems to be the quarterly GDP number that the US released last week. I am skeptical that this positive number will continue to hold up, especially when their largest trading partners are showing signs of slowing. Moreover, the median Fed projections suggest that the US Fed Funds rate will be 1% lower by the end of 2024.

If the Fed Funds rate projection is true, then the equity markets are the best place to invest. Historically speaking, the S&P 500 has risen 16.5% one year after the final Fed interest rate hike. Cash and money market investments erode - 18 months after the final Fed hike, they have a negative 2.5% return.

In conclusion, if you are holding cash or money market investments, now is the time to invest. If you are already invested, stay the course. There are many sectors of the market that appear to be extremely attractive!