There is a noticeable chill in the air as fall heads to winter. That chill is also extending into the economy. Housing inventory has increased, retail sales are starting to show weakness, inflation is stickier than expected, and household debt is extremely high. Couple that with two wars to the East of us, and things could be interpreted as bleak.
We believe however, that there are reasons to remain optimistic for the year ahead (and beyond).
- Stocks and Interest Rates
Right now, investors are fretting over the “higher-for-longer” theme on interest rates. But higher interest rates and weak bond prices do not automatically mean weakness for stocks.
For example, in 2013, coming out of the financial crisis, investors had a taper tantrum as the United States Federal Reserve started reducing its support for the bond market. Rates rose and there was a good deal of panic. But the S&P 500 rose 30 per cent that year and went on an eight-year run, with only two small annual losses, in 2015 (less than one per cent) and 2018 (6.2 per cent).
- Peak Interest Rates
As interest rates rise, it is a fact that every hike has shifted us closer to the peak. The closer we get to the top, the closer we get to a rate reversal. Watching interest rates rise sharply in the past year and a half has not been fun, but we do not think anyone expects them to rise at the same rate next year, if at all. Indeed, the market is already starting to price in rate cuts in 2024.
Once investors genuinely think hikes are over, the market should start doing much better.
- Market Sentiment as a Contrarian Indicator
Negative market sentiment is normal, especially after a poor year for stocks and bonds like 2022. Currently, no one favours bonds. No one likes gold. Banks are being treated like all their loans are going into default. Real estate investment trusts recently hit three-year lows. Small-cap stocks have been destroyed. Big Tech stocks are lost some of their early year gains in September and October. Commodities are no fun. Utilities and telcos — supposed to be the safest sectors — are getting pummelled.
When there are no positives, valuations change for the better. When all the news is bad, any tiny tidbit of good news can have an amplified positive impact on stocks – This month alone, the S&P500 and Nasdaq have returns of 5.28% and 7.37% – take that, GIC rates! Rest assured, your Portfolio Managers have utilized the recent dips to properly position their portfolios for an eventual market recovery, with the catalyst being the eventual decline of interest rates.
Dollar Cost Averaging
We continue to be advocates of dollar cost averaging as a formal, structured method of lowering risk and potentially improving long term returns. If you are nervous about the markets, as most of us are, please contact us and we will explain this proven risk reduction strategy and how it can help you.
One Last Thing:
As of January 1st, 2024, TFSA contribution room increases by an additional $7,000. RRSP limits are also increasing to a maximum of $31 560 for 2024.
