Hope this finds you well and that your summer is off to a great start!
Let's dive into market outlook and expectations for the 2nd half of 2024...
The first half certainly brought good news as we continue to see equity markets positive on the year. However, in lieu of this strong 1st half we do see some softness ahead and cracks are appearing. It takes about 10 quarters (approx. 2 years) from the start of an interest rate hiking cycle to work through and have the desired effect on the economy. And that is where we are today. Although we have not seen material impacts of this rate cycle, it does not mean we are out of the woods just yet.
Leading economic indicators are improving but are still reading negative. For example, we are seeing a slowdown in housing starts and Canadian unemployment rate hit 6.5% (the highest level since 2022). The ISM index (new orders vs inventories) measures manufacturing, with a reading over 50 representing an expanding economy and a reading less than 50 representing a contracting economy. The current ISM index reading is 40. These are a few of the LEI's (Leading Economic Indicators) to back our view of a slowing economy.
Conversely, consumer spending has been supplying resilience to a slowing economy. Unfortunately, we don't believe the current spending can be maintained, as personal savings rates are now below pre-pandemic levels. Another interesting stat is that non-mortgage owners tend to carry higher credit card balances with over 10% of this group carrying a CC balance of greater than 80% of their credit limit. We see consumer spending weakening over the next few quarters.
Summary: We believe we are in an economic slowdown - not necessarily recessionary but a slower growth pattern than we have seen in the past 4 quarters.
How does this affect our investments?
Active management focusing on stock picking and sector/geographic allocation are key to uncovering opportunities as earnings are likely to be choppy the next couple quarters. What do I mean by, "active management"? To understand, we must first define “passive management”. Passive is when we invest in an index, where there is no active stock picking and the returns simply mirror the index being tracked. Currently the US index is driven by the top 10 tech companies. If you are “passive” you are definitely overweighted and aligned with these top 10 companies, hoping they drive the index higher.
Conversely, "active" managers are selling positions of these companies and cashing in on the growth and then re-allocating to undervalued companies that represent opportunity. Selling high and buying low is a great example of active management in volatile times. This reduces portfolio risk, and decreases volatility. Actively managed portfolios are set to outperform with more diversification and downside protection while alleviating concentration risk.
Important take-away? Our portfolios are actively managed!
Fixed income (Bonds)
Patience and flexibility will be rewarded!
As we see interest rates around the world begin to be cut for the first time since March 2020, we anticipate the U.S. Fed to start unwinding their restrictive stance, likely in September. (This is very data-dependent but we fully expect a September rate cut from the Fed.) We anticipate the U.S. to finish the year with 2 to 3 rate cuts ending the year at 4.75%.
What was a headwind for bonds during the rate increase cycle has turned to tailwinds for bonds. I have been speaking about the opportunities in bonds for some time but we are now seeing the expectations play out and are set up for long-term performance from our bonds as those prices remain below their historic averages and yields are above their historical average. This is a combination that doesn't happen very often.
Bonds are back and will bring 3 things to a portfolio moving forward:
1- Will bring return to the portfolio.
2- Will reduce the volatility of a portfolio.
3- will act uncorrelated to equity markets.
U.S. Elections
Although policy decisions will impact markets, over time, going back to 1945, the S&P total return averaged 12.5% regardless of the presidential party in place. Meaning markets are quite agnostic to politics!
Oil
Most gurus believe that oil will remain in the current range bound as supply dynamics are starting to balance.
CND $ vs U.S. $
We do not anticipate a Canadian dollar dropping into the $0.60 range even if Canada reduces rates by 200bps.
Summary: An actively managed portfolio with a balanced approach will navigate the balance of 2024 quite confidently!
I hope this analysis and summary helps bring some clarity as we move through the 2nd half of 2024. As always, we value your trust in business. Please reach out with any questions or if you would like to review your finances in detail. Always just a phone call or email away and always happy to help!
Enjoy the rest of your summer!
With kind regards,
Roger Banks
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