2023 Capital Markets Overview
After a forgettable 2022 for investors (one of the worst years on record), Global Capital Markets bounced back in 2023 with impressive gains for both Fixed Income and Equity asset classes.
Central Banks made notable strides in their efforts to reduce inflation without causing much economic damage, which was a catalyst for both stocks and bonds during the year. Investors were absorbed with inflation reports, central bank commentaries and monetary decisions throughout the year which led to some very volatile periods for markets.
The S&P 500 (US Equities) outperformed most markets on the year as its heavy weighting to technology significantly benefited from the buzz created by Artificial Intelligence (AI).
The Canadian Bond Universe (representing government and corporate bonds of varying maturities) was up a strong +6.5% in 2023.
2023 Capital Markets Review: Equities Commentary
US Equities (S&P 500) posted a very strong return of +26.3% (in USD) in 2023. However, equity returns in the US were very concentrated in the ‘Magnificent 7’ stocks (Google, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla). These stocks account for about 30% of the S&P 500 and were up on average +110%, contributing to over 2/3 of the S&P 500’s 2023 return. In comparison, the Equal Weighted S&P 500 Index (where the ‘Mag 7’ account for only 1.4% of the Index weighting) was only up +11.5% in 2023.
The MSCI World Index was up +22.2% in 2023, heavily influenced by its 67% US weighting. The MSCI EAFE Index, representing developed markets outside North America, was up +15.7% in 2023.
The Canadian S&P/TSX was up a respectable +11.8% in 2023, but generally underperformed most global markets because of its low technology weighting and poor performance from a heavily weighted oil & gas sector.
2023 Capital Markets Review: Fixed Income Commentary
After a terrible 2022, the Canadian Bond Universe posted a strong return of +6.5% in 2023. Longer-term Bonds (+8.9%) outperformed shorter-term Bonds (+4.8%) over the year.
Fixed Income returns were highly volatile throughout the year on investor speculation and wishy-washiness about further rate hikes/cuts/pauses.
Bond returns surged in Q4 (+8.6%) on optimism that interest rates had peaked and rate cuts were on the horizon.
Given the dramatic increase in the Bank of Canada policy interest rate over the past two years (from 0.25% to 5.0%), short-term interest rates remain very attractive with yields generally around 5%.
2023 Economic Review
After Inflation surged to 40-year highs in 2022 (8.1% in Canada and 9.1% in the US), Central Banks have been on the offensive to combat inflation. In 2023, the Bank of Canada and the US Federal Reserve continued to raise their key interest rates to 5.0% and 5.5%, respectively (up significantly from the 0.25% level some 20 months ago).
As a result of the interest rate hikes, inflation cooled substantially in 2023 with both Canada and US inflation dropping to 3.1%.
Neither the Bank of Canada nor the US Fed has increased interest rates since late Summer 2023 with inflation reports showing continued improvement; however, inflation levels still remain above the Central Bank’s 2% target.
The economic fall-out from interest rate hikes appears to have hit Canada harder than the US. After a strong start in 2023, Canadian GDP growth has stagnated, and the economy may be on the brink of recession. Canadian 2023 GDP growth is expected to come in about +1.1%, while the US is expected to fare much better at around +2.5%.
The Unemployment Rate in Canada increased from 5.0% to 5.8% (a 22-month high) in 2023. The US Unemployment Rate remains strong at 3.7%.
The Canadian Dollar appreciated +2.3% versus the US Dollar during the year (from $0.739 to $0.756).
2024 Economic Outlook
The two main (and most important) consensus forecasts for 2024 are that economic growth will slow and that central banks will begin to start cutting interest rates sometime during the year. However, economic views vary on how much the economies will slow and when the interest rate cuts will begin.
Given that the Canadian economy is showing more signs of weakness than the US, the Bank of Canada may start cutting rates before the US. The US Fed still appears to have a shot at a “soft-landing” (bring inflation under control with minimal economic damage) despite the many “expert” opinions to the contrary only 12 months ago.
GDP forecasts suggest sluggish growth for both Canada and the US in the first half of 2024 with possible recessions in Canada and the US (but more likely in Canada) with improvement in the second half of the year. Consensus estimates call for a mere +0.5% GDP growth in Canada for 2024, while the US is projected to grow slightly better at +1.0%.