2023 Year in Review

Ashleay: Hello and welcome to our "In Your Interest!” podcast. This week with my colleagues Sébastien Mc Mahon and Marc Gagnon, we'll be taking a look back at a year full of surprises, most of them being positive. Despite general economic concerns at the start of the year, the global economy held up well and Wall Street was even generous. So, hi, Sébastien. Hi, Marc.

Sébastien: Hello, Ashleay. Hello, Marc.

Marc: Hello, Ashleay. Hello, Sébastien. Thanks for inviting me again this year.

Ashleay: It's always a pleasure to have you.

Sébastien: Yes, my favourite episode of the year, when we recap what happened and we look forward, you know, that's the best. Christmastime is almost upon us too, so yeah.

Ashleay: Yeah, absolutely.

Marc: Yeah. Like you said, that's, and I think in our industry we cannot really escape that exercise to, you know, look back, think about what we got right and what we got wrong and try to do better for the next year.

Sébastien: Do you sometimes get things wrong? I do that too.

Marc: Yeah, yeah, I think yeah. I would like to say that it doesn't happen, but unfortunately it happens. But, you know what, it is important and we need to be more right than wrong. So hopefully that's what's going to happen.

Ashleay: Yeah! Let’s say we kick it off with the first question. Could you briefly remind us what your expectations at the start of the year were?

Sébastien: Yeah, maybe I’ll get started here. Last year's forecast for 2023 was rather, I will say, pessimistic or negative. And we had some pretty good surprises through the year. We did expect the global economy to slow down. And this is what we got. The global economy slowed down. China reopened but, you know, never really gave any of the outcomes, the positive outcomes that we were expecting. Canada is in a per capita recession right now. We can discuss that later. Maybe the US was a rare bright spot in 2023 for a multitude of reasons. We're expecting central banks to think about cutting rates. Not yet in 2023, but, we are getting close to that now, so, we’re right on that. One place where you, Marc, were very right last year is that you were expecting businesses’s earnings to contract during the year, but still, that did not make you pessimistic about the stock market in general—where I was wrong, clearly, you were right.

Marc: Yeah. It was a matter more of a multiple increasing because yeah, the earnings especially in Canada, I said they would go down between 10 and 15%. And if you look at the end of Q3, that's exactly, compared to Q3 2022, they were down 15%. So yeah, I was pretty right about that. And multiple did increase because we have a positive return, though. So that was not that bad, I guess, for a call. But I can return you also a compliment about that, because you said that central banks would cut rates at the beginning of 2024, and you were clearly out of consensus—we all know that the market was expecting, well, close to three cuts, rate cuts in 2023. Guess what? We got none.

Sébastien: Yeah. Both in Canada and the US.

Marc: Both in Canada and the US. So, you were bang on on that one.

Sébastien: Yeah. And now, we're talking about 2024 for rate cuts. Uh, maybe not even early 2024. Maybe it's even later in 2024. Can always discuss that later. But uh, the biggest surprises I would say, were that the US economy—very solid in 2023, we saw that the consensus was revising its forecast even higher as we move forward in the year. A lot of that has to do with the fiscal deficit, which continues to grow. Lots of infrastructure spending took place in 2023. Savings for households, excess savings were even revised upwards during the year, realized that households are still flush with cash. So, you know, the long and variable lags for monetary policy that we're expecting to hit in 2023—maybe now it's more of a 2024 story.

Marc: Yeah, that's an important thing that they revised the excess saving. You know, sometimes you feel lucky, I don't know if it happens to you Ashleay, when you find $20 in your pocket. But the United States, they realized that the excess saving was, uh, revised upward by $700 billion. That's a lot of money to find.

Ashleay: I wish I would find that in my pocket, honestly.

Marc: So, yeah, it makes it makes a big difference in terms of, oh, there's, you know, a lot of money still to spend. And about the same time we had that uh, monster quarter in terms of GDP growth, the third one in the US, 5%. And then just after, the Fed came out and said, you know what, you know, rates will stay higher for longer, then the market just realized, oh we're never going to get those rate cuts. So the market went down very, very fast, very rapidly. And then it bounced back for, you know, just because we started to see a couple of negative news, economic news, which is funny because it illustrates, you know, at the end of the day, you might be right, but, you know, you felt like you were out of, completely out, you know, completely wrong for a while, and then you're completely right. And that's the beauty of our job, I guess.

Sébastien: Yeah. And our job is to balance the risks. And, you know, when we see economic risks, history tells you that when central banks tighten by as much as they did over the last 18 to 20 months, usually, you know, the economy becomes weak or vulnerable. We know that the delays are unpredictable and, you know, trying to time the markets is not always easy. Markets have reacted positively to the fact that the recession seems to be pushed back further and further. Maybe we won't even have a recession in 2024. We need to stay nimble on that call. But so far, so good. But you know, the volatility that we didn't get in 2023, maybe we'll have that in 2024.

Marc: Yeah that's a fair chance to see that. But yeah, I listened back to our podcast from last year. And yeah, we were basically right on the fact that the economy would slow down and the rate cuts will be pushed out. So, I think we can give ourselves a, you know…

Ashleay: A pat on the back.

Marc: Well, maybe not perfect grades, but good enough, I would say.

Sébastien: Passing grades.

Ashleay: And what surprised you guys the most this year from an economic point of view? And what were your biggest surprises on the markets?

Sébastien: Well, if I can start with the economy already, I think the biggest surprise out there was the resilience of the US economy. We already discussed that. The second biggest surprise maybe is what happened in China, uh, the change of target from the government for, uh, you know, deleveraging the economy to have sustainable growth for the long run. That means pain in the short run. And now we see that demography is weighing on China, as you often say, Marc, China is becoming old before it's becoming rich. So, we’re seeing this at work this year. So, demography plus deleveraging. Now, I'm not an expert on China, but all of the experts that I read are pretty clear in their prognostic that, you know, the window for China to eventually become the largest economy in the world might just have closed. That's a big development.

Marc: Yeah, that's a big development that will be important to follow because, you know, that was a clear leader of the economic worldwide growth. And it might not be there as much as we thought. And going back and looking back to 2023, you're absolutely right, I thought that the reopening of the Chinese economy would be a major favouring event for the markets, the different markets and the Canadian market, which is exposed, as we know, to commodities. And I was right to forecast that the lockdown will end pretty soon in 2024, but I was completely wrong thinking that the economy would kickstart because of that. It actually didn't work that way.

Sébastien: How surprised were you by what we now call the Magnificent Seven?

Marc: Oh, that's the other big surprise, I guess, of 2023. Some people will say, look at the market performance, the S&P 500 performance in 2023. And you're going to see how wonderful it has been, you know, in terms of performance for that year.

Sébastien: About 20%, something like that.

Marc: Yeah, about 20%. Exactly. Yeah.

Sébastien: It's a very strong year.

Marc: It’s a very strong year, especially when the economy is slowing down. But when you look a bit under the hood, you're going to see that, uh, there's those Magnificent Seven and Wonderful World.

Ashleay: And what are those Magnificent seven? I'm assuming we're not talking Avengers here.

Marc: No, exactly. They are not Avengers. They are seven big companies. Some of them were part of the “FANG”. Uh, we have Microsoft, we have Facebook, we have Google, Amazon, we have Tesla. A newcomer in the group this year, Nvidia. So, all those companies, and Apple. So, all those companies, they represent close to 30% of the S&P 500 now. And they were up 71% on a market base in 2023. So, when you have the overall market being up 20% and those guys being up 71%, what happened to the rest? The rest is only up 6%. So, the S&P 493 is up 6%, which is you know, as you probably know Sébastien, about the same return as the Canadian stock market. So when we talk about the great year in the US, we have to think a bit about this little detail, let's say, and I hope that if you have invested some of your money in the US, your portfolio manager has invested, you know, a significant portion or a significant enough portion of his fund in those companies, because you might not be, uh, you know, as happy as what the index would like you to think.

Sébastien: And for the stock market, you're right. This was kind of rushed out of the gates. And when ChatGPT was announced somewhere around March, something like that, then that was a catalyst for this.

Marc: Yeah, that was a huge catalyst because five of those seven companies were exposed to ChatGPT. And we're a bit in that situation where there's a bit of a fad, you know, where people are like, oh, it's going to change everything. It's hugely important. It is, but sometimes, you know, it takes time before those things unfold and you can turn those, uh, discoveries into, uh, business models that are sound and livable. Uh, so in that case, for example, you know, we have Nvidia, they're selling chips that help iA to expand, to perform, to be even better. So, these guys there, there's real profit. There's real benefit. Uh, Microsoft has an interesting strategy that takes into account also ChatGPT. But the other ones, it might take a little longer before we see the benefits, the benefit of this innovation. So, you know, there's maybe, there will be some adjustment along the way. Maybe it will take a little longer than expected before we see those profits and we recoup the valuation, uh, that those stocks are right now. But, uh, yeah, that's going to be very interesting to follow.

Sébastien: And maybe if I can talk about the other half or close to half of most everyone's portfolio is in the bond market. Um, interest rates were much more volatile than we expected this year and volatility on the higher side. So that means that returns were less than what we would have expected at the beginning of the year. And risk adjusted returns were even worse because of all of the volatility. You know, at the beginning of the year, it was tempting to announce the peak in long rates because rate cuts were maybe late 2023 or early 2024. Now we keep pushing them back or there's volatility around this forecast here. So, the sight of a soft landing here is driving the markets. So, you know, on the whole I would say Ashleay that the surprises that we had this year were mostly positive. So, I want to apologize to anyone who was depressed listening to our forecasts last year. Uh, performance of balanced funds this year, 5 to 10%, depending on the region. So, much better than expected, you know, but 2024 could be a volatile year again. So, some themes to follow, I think will be continuations of what we've seen in 2023.

Ashley: That's fantastic. Well, thank you so much Sébastien. Thank you, Marc. And that is all for today. We hope you enjoyed this overview of the Canadian and US economies over the past year, the financial markets as well as the outlook on global economic issues. So, thank you all for being here and we hope you are having a fantastic holiday season and wish you a great 2024. Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.