November witnessed a robust performance in the stock markets, with the Nasdaq gaining 11.31%, the Dow Jones rising by 8.77%, the S&P increasing by 8.92%, and the TSX experiencing a 7.22% gain for the month.
Our investment thesis, established at the beginning of 2023, anticipated a positive market trajectory post-October, barring unforeseen abnormal market events. As of now, our thesis remains intact and on track. The prevailing consensus suggests that interest rate increases are behind us, and inflation is moderating, expected to align with the central bank’s target of 2% in the coming months.
Contrary to this prevailing view, we project central banks won’t implement interest rate reductions until at least the latter half of 2024, and any reductions are expected to be modest. Our perspective is that, while the economy has returned to a state of “normalcy” after two decades, the market is preempting the likely pace of interest rate cuts. The absence of a normal interest rate environment for over two decades, marked by a decade of zero interest rates, quantitative easing, and central banks attempting to induce inflation, underscores the current transition.
The 10-year US Treasury yield, averaging around 4.5% historically, has receded from its October peak of 5% to approximately 4.3%, with inflation trending back towards the 2-2.5% average. Economic data is converging towards its long-term average, exemplified by the upward revision of US Q3 GDP to 5.2%. In contrast, the Canadian economy reported a Q3 contraction at -1.06%. A negative Q4 in Canada would signify a technical recession. However, the US GDP readings do not indicate a recession in the first half of 2024, precluding anticipation of central bank interest rate reductions.
At Investment Strategies, we anticipate interest rates persisting at current levels, with modest decreases in late 2024, barring major economic shocks or a deep recession. The central bank’s aspiration for a “back to normal” interest rate environment has materialized, and a return to the ultra-low interest rate environment is not foreseen in the near future.
Corporations are adapting to this interest rate environment, leveraging the inflationary conditions to expand their margins. Many are reporting record profits and thriving in these economic conditions. While we expect economic moderation in 2024, corporations are positioning themselves for this scenario. We view this interest rate environment as conducive to the economy in the medium and long term, with adjustments ongoing to thrive within it. Our outlook for the stock market in 2024 is positive, with potential upside surprises, barring a deep recession. In such a scenario, well-managed entities would excel, while over-leveraged and poorly managed ones may face the imperative to adjust or dissolve.
