Each quarter, La Presse asks four experts to analyze the situation to grow a fictitious portfolio with an initial capital of $100,000. In this first meeting of 2024, these experts briefly look back at the end of 2023 and explain their outlook for the coming months on the financial markets. Also, they are recalibrating their asset allocation for the first quarter of 2024 based on a reference balanced portfolio, i.e. established at 60% in stocks and 40% in bonds and cash, with distribution differences limited to 10% plus or minus.
“Financial markets closed out 2023 with stellar fourth-quarter results, as investors’ hopes for a change in central bank monetary policy sparked a strong rally in stock and bond markets. In fact, financial markets ended 2023 with one of their best performances in 25 years. However, the majority of gains have occurred in recent months, after renewed optimism about the likelihood of a “soft landing” for the U.S. economy. Ultimately, as investors raised their expectations for a rate cut before mid-2024, global stock markets reached all-time highs and bond markets performed respectably. »
“The highlight of the fourth quarter was the change of tone from the American Federal Reserve [Fed], which surprised the financial markets by suggesting an interest rate cut in 2024 thanks to the economic slowdown and the decline in inflation in the United States. In fact, the Fed anticipated by a few months its precursor message of the rate cut which was rather expected during the first quarter of 2024. This is why the financial markets reacted sharply, in particular the bond market [Editor’s note : gain in value of bonds with higher interest rates]. For my part, my asset allocation in the Fictitious Portfolio was not positioned for such a rebound, having focused more on cash as a preventative measure. This is what confused my results at the end of the year despite the good performance of my overweighting in American equities. »
“There was no shortage of surprises in the financial markets at the end of the year. Starting with the persistent tone of the American economy, which suggests a “soft landing” over the coming months instead of the start of a recession. Also, the decline in inflation prompted Fed leaders to open the door to lowering interest rates around mid-2024. In the financial markets, after the decline that occurred at the end of the summer, these somewhat surprising elements of the economic situation triggered a spectacular rebound in stock indices and bond securities values. In this context, and against all expectations, even defensively positioned investments [Editor’s note: more bonds and cash, fewer shares] managed to do well.”
“I take away two highlights from the fourth quarter. First, the change in tone from the Fed which signaled the end of interest rate increases. Then, the resilience of the American economy, particularly with employment, and progress in the fight against inflation have revived expectations of a “soft landing” of the economy instead of a recession. The combination of these factors largely explains the strong surge in share values on the stock market from October onwards, as well as the sharp rebound in value in the long-term and higher interest rate bond markets. Ultimately, all major financial asset classes performed very well in the fourth quarter, helping to boost returns for all of 2023 despite the mid-year decline. »
“As debate over a so-called “landing” of the US economy continues in financial markets, the Fed is calling for a “soft landing” whereby inflation would ease without inflicting major damage to the economy ahead of rate cuts in 2024. However, this attempt to engineer such a landing could backfire if premature rate cuts trigger a second wave of inflation. Meanwhile, if the resilience of the U.S. economy persists, combined with a tighter-than-expected jobs market and a re-acceleration of inflation, central banks would undoubtedly reconsider their plans to cut interest rates . In this context, the prospect of prolonged inflation and interest rates could lead the economy and financial markets towards a prolonged period of stagnation. »
“What I am most interested in at the start of 2024 is the situation of the American economy as well as the confirmation of the decline in inflation. These two elements will be decisive for the start of the interest rate cut by the Fed: either from the first quarter or during the second quarter of 2024. In Canada, in the meantime, the economy, already in turmoil for several months, is heading towards a relatively modest recession in the first half of 2024. This situation could encourage the Bank of Canada to get ahead of the Fed by lowering its key interest rate, which could harm the value of the Canadian dollar after its rebound in recent weeks. »
“The financial markets are looking a little after their strong rebound in optimism at the end of 2023, which brought their value multiples back to somewhat high levels in a context of economic slowdown. Therefore, among the elements that I am most following at the start of 2024, there is firstly the evolution of core inflation [Editor’s note: excluding the more volatile prices of food and gasoline] towards the central bank target rate. In fact, until core inflation hits target, interest rate cuts may have to wait, thwarting financial market expectations. Furthermore, I monitor the short-term economic situation, in particular the return to balance in the job market in order to mitigate the impact and additional costs generated by the scarcity of labor. Finally, I am following the upcoming announcements of quarterly results for the end of the 2023 financial year and forecasts for 2024 from the most influential companies on the stock market. For the moment, I consider that earnings expectations remain too high, while the impact of interest rate increases is not yet fully felt in the economy. »
“After the very strong surge in the markets at the end of 2023, the main stock indices find themselves with value multiples [Editor’s note: price/earnings per share] at high levels. Obviously, a lot of good economic news [falling inflation, absence of recession, interest rate cuts, etc.] is already counted in the valuation of financial markets. This seems a bit much to me in the still fluctuating context of the economic situation and inflation; a context which could further encourage the Fed to postpone the planned cut in interest rates until mid-year. In the meantime, I notice that the “overbought” indicators [or overbought in stock market jargon] are coming back on in the financial markets. For investors, this should encourage them to exercise caution in the short term, while the desired scenario of a “soft landing” for the American economy becomes clearer. »
“The prospect of a “soft landing” for the US economy and a sequence of interest rate cuts in 2024 has sparked a wave of optimism in stock and bond markets. Caution is warranted, however, as these markets could be vulnerable to disappointment if the macroeconomic environment evolves in a manner contrary to expectations. Therefore, I maintain an underweight in stocks and bonds. The risk of a short-term stock market correction has been amplified by overvalued and overbought market conditions following the exceptional performance at the end of 2023. At the same time, I maintain a significant overweight in cash. I consider that this cash balance remains very attractive from a risk/return point of view following the largest and fastest rise in interest rates by central banks in over 30 years [Editor’s note: key rate increased from 0.5% to 5% in around fifteen months].
“After a surprising end to the year in the financial markets, I am reshuffling my asset allocation based on the economic and financial outlook ahead of us. Thus, I am reversing my overweighting in cash from 20% to 0% [compared to the benchmark balanced portfolio]. In return, I am increasing my allocation to bonds [from 15% to 40%] in order to be ready to benefit from the rebound in the market value of bonds when the rate cut planned by the Fed becomes clear. In equities, I return to a neutral allocation [60%] compared to the reference balanced portfolio for one main reason: after the considerable rebound at the end of 2023, I prefer caution while awaiting the next quarterly results of companies, as well as their forecasts for 2024. Mainly, I am reducing a little my overweighting in American stocks which I consider already well valued [from 35% to 32%]. Also, I am increasing my weighting in Canadian stocks [from 14% to 18%] in order to benefit from their value reduced by the unfavorable economic situation in predominant sectors such as banks, raw materials and energy. »
“There is little change in my asset allocation at the start of 2024, while the financial markets are awaiting the next economic data. Thus, I am neutralizing my previous overweighting in cash [from 8% to 5% in the reference balanced portfolio] and I am increasing my overweighting in bonds [from 37% to 39%]. With these changes, I expect to be better positioned for a decline in interest rates and, therefore, a rebound in bond values already on the market. On the equities side, I am reducing my general underweighting [from 55% to 56% compared to 60%] by increasing my allocation to American equities by one point, which thus increases to the equivalent level [20%] to that of the reference balanced portfolio. Despite the strong rebound at the end of 2023, I expect the American stock market to remain resilient over the coming months as the economic situation clears up. »
“After the strong surge at the end of 2023, the outlook for financial markets is a bit more complicated at the start of 2024. Therefore, I am sticking to minimal adjustments to my asset allocation in the first quarter. I am maintaining my cash overweight at 15% [compared to 5% in the benchmark balanced portfolio]. On the other hand, I am increasing my underweighting in bonds [from 25% to 23%] because I anticipate a rebound in bond rates [Editor’s note: and drop in value of bonds already on the market] in the first quarter due to the resilience of the economy and job market in the United States. On the equities side, I am neutralizing my previous underweighting [from 57% to 60%] by focusing more on Canadian equities [from 23% to 25%] and international equities in developed economies [EAFE, from 18% to 20 %] mainly due to their value multiples being less inflated than on the American Stock Exchange. This is also why I maintain an underweight [at 15%] in US equities, which I see as at risk of an overvaluation pullback after the strong surge at the end of 2023.”