We think the easiest way to look at this is to break the time in two. First, let me try and explain the drop from August to October. That period was influenced by rising interest rates in fixed income markets. Stock prices fell in response to the increased rates and then, in early October, the markets also had to contend with the shock of the attacks on Israel. November on the other hand showed a steep decline in yields across the interest rate curve and that decline, coupled with a very dovish message from the Federal Reserve in its December statement and by Chair Powell at the subsequent press conference generated and continues to support a massive stock rally.

We suspect that one of the key contributors to differences in consumer spending in the United States when compared to Canada has been the deceleration in housing activity in Canada. Housing does tend to be a provider of funds for consumer spending on everything else (see the record number of sales during Black Friday and Cyber Monday in the United States). In previous commentaries we have discussed how the period of low mortgage rates in the US “handcuffed” people to their 30-year mortgages at 3-4% (current 30 year mortgages in the US are about 6.7%). Heading into 2024 we would expect US consumer spending to remain positive as consumers prioritize services and less expensive goods in a higher rate environment.

Canada on the other hand, has much higher debt levels and consumers, particularly those in variable rate mortgages or open lines of credit, have less discretionary spending. Canada has now had 2 negative quarterly GDP reports in the June (later revised to positive) and September quarters although we suspect the Canadian equity market has largely responded to that data, potentially setting up a good opportunity on the Canadian front. We are very mindful of the effects of current fiscal policies on the companies we own and try to be as selective as possible.

At its December meeting, the Bank of Canada announced yet another hold in its policy interest rate, a third hold after raising the rate to 5.0% in July. While the bank said that the “Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further as needed”, we would be shocked if they were to raise interest rates in the face of slowing consumer spending, an easing in the labour market and negative GDP growth (reported -1.4% real quarter over quarter annualized). We also think some of the recent government policies have affected our economy in key sectors (think aerospace, luxury tax now applies on airplanes). Government spending is under pressure to be reduced or revenue increased, forces that will further dampen growth making it easier for the Bank of Canada to begin reducing rates. That should result in much higher bond prices eventually.

With regards to US interest rates, we would quote our US Research Provider Argus: “Argus continues to believe that the Fed’s 2022-2023 rate hike campaign is over. The combination of slowing employment growth and moderating inflation has virtually eliminated any chance of the Fed raising interest rates”. According to the CBOE FedWatch tool fewer than 1% those surveyed expect a rate cut as of November 11. The Fed has now announced the possibility of 3 rate cuts next year (data dependent of course).

We believe all investors will continue to see signs of strength in fixed income instruments and in bond proxies like dividend paying equities. We think it likely that the Bank of Canada will be communicating decreases in its policy rate by spring or early summer of 2024, which will give bonds further support.

Our three favourite market sectors heading into 2024 are Industrials, health care and technology. While we are mindful of technology valuations (and, you may see some reduction in our allocation to the sector), we feel technology will continue to be a growth driver for the economy in the coming years as companies incorporate more AI tools to enhance productivity.

As 2024 comes into view, new opportunities and challenges will undoubtedly present themselves. While inflation data has become increasingly favorable, we have to acknowledge an overhang of higher prices that could continue to slow consumer spending on both sides of the border.

The geo-political landscape is loaded with potential potholes. In the United States, it is a presidential Election year and it is certain to be a contentious election as Donald Trump seeks to become the first person to win nonconsecutive presidential terms (nevermind that he is also the first potential candidate to be under federal indictment). Internationally, the Israel-Hamas conflict could be resolved, remain a localized war or widen into something more dangerous; and, the Russia Ukraine conflict remains in a similar state. In China, President Xi’s determination to reclaim Taiwan adds another wild card to the deck when it comes to stock valuations.

We believe that the economy and earnings will continue to rise in 2024 and that falling interest rates and lower inflation will make stocks and bonds a favourable place to be.