A New Year’s hangover for markets

Market Recap

• Equity markets struggled this week after expectations of early-2024 rate cuts met the reality that those cuts are likely still some time off.

• The S&P 500 fell 1.5% on the week, with weakness in technology and consumer discretionary offsetting gains in health care and utilities.

• Meantime, the TSX gave back just 0.1%, with solid gains in telecom and energy lending support, while technology and consumer stocks fell.

Stock Markets

Equity markets have gotten off to a notably slow start in 2024, with the S&P 500 experiencing three consecutive days of declines—the first time that’s happened at the start of a new year since 2015¹. Does this signal where markets are heading over the next 12 months? In our view, it’s not necessarily a sign of where markets will end up, but it is a sign of how we might get there: expect more volatility in 2024 than we saw in 2023. In Q4, there was a nice year-end rally, which was made possible by the U.S. Federal Reserve’s (Fed) pivot away from rate hikes and toward eventual interest rate cuts. This rally, however, may have inflated investors’ expectations, leading them to believe that the market environment is more promising than it actually is. Viewed through that lens, markets’ sluggish start to the year is a splash of cold water. That said, we still expect markets to be higher—even with more volatility potentially on the horizon.

Bottom Line: While markets are likely to be more volatile in 2024, the slow start to the year may simply be people taking off some profits after a strong end to 2023.

Interest Rates

Turning to bonds: rate cuts are still the expectation, which would signal a better environment for bonds in 2024, though the magnitude of those cuts remains in question. The recently-released minutes from the Fed’s last meeting seemingly confirmed this rosier outlook, revealing that internally, they aren’t expecting any more rate hikes. The timing of cuts is still the big question. The Fed minutes would seem to indicate that three rate decreases are planned for 2024. Markets, however, are pricing in even more cuts and are expecting at least one decrease as early as March. We think it’s unlikely that the Fed eases rates in Q1, and if we see a cut in Q2, it’s likely to be later in the quarter. The Bank of Canada (BoC) may decrease rates sooner, but the Canadian economy and consumer are weaker than their American counterparts, so it’s not an apples-to-apples comparison. Central banks’ cadence is supposed to be: 1) higher rates; 2) a pause; and 3) rate cuts. Too many investors seem to be skipping the pause and going directly to the rate cut story, which is creating unrealistic expectations.

Bottom Line: People are forgetting the longer in “higher for longer.” Our expectation, based on the Fed’s minutes, is that rate cuts in the U.S. are unlikely until late Q2 or Q3.

Consumers

Can the consumer stay strong in 2024? We’re definitely seeing the consumer weakening, but that doesn’t mean they’re weak. Given their relative resilience, we can expect them to continue to spend, though they are likely to be more selective about what they’re buying. It’s important to keep in mind that 60% of consumer spending comes from the bottom 80% of income earners. These households have already diminished much of their savings, meaning that going forward, the economy must lean on higher income earners and/or lower income earners borrowing more, which they’re already doing. Our expectation is that overall, consumers will hold up reasonably well in 2024, but it will be a somewhat different story than last year. In 2023, consumers were expected to be weak but demonstrated great resilience. This year, the bar has been re-set higher, and they could be a bit weaker than expected.

Bottom Line: The consumer is likely to be less relevant in driving the economy in 2024, as we expect them to be somewhat weaker than they were last year.

2024 Outlook

On Wednesday, January 24, we’ll be releasing a special report and video featuring our outlook for 2024. It will include a recap of where markets are heading, risks and opportunities, as well as our team’s bullish or bearish ratings on bonds, dividends, and four specific sectors: Financials, Real Estate, Health Care, and Technology. Stay tuned to this space for more details on how you can access it.