Year ahead 2024

Ashleay: Hello and welcome to the In Your Interest! podcast. I'm Ashleay and I'm pleased that you're here with us today. Sébastien and I are joined by Marc Gagnon, Portfolio Manager, North American Equities. And today we turn our gaze to 2024 and share with you what our crystal ball suggests for the year ahead. Will it be a good year for investors, or will we still feel the aftershocks of the sharp interest rate hike launched in 2022? So, hi, everyone!

Sébastien: Hello, Ashleay.

Marc: Hello, Ashleay.

Ashleay: Alright, so if we look ahead, let's play the prediction game. Let's say if we start with Marc, since you're our guest, what do you think will be the economic and financial news of 2024?

Marc: I think that the most important thing that we will have to watch for in 2024 will be when, and if but probably more when, central banks will cut their interest rates. And that will be a major element for financial markets. And of course, that will depend on a lot of things, you know, how severe is the recession, how is the inflation rate going, is it still going down, at what pace and so on. Is it durable? But that's really the main point. When and how much and at what price, also, probably there will be interest cuts.

Sébastien: Yeah, I think 2024 will likely be the year of rate cuts. So, that's good news for everyone out there, especially if you have a mortgage and, you know, on the credit it's going to be much easier. But the reason why we think that now's the year is that, well, unemployment is on the rise. It's not necessarily because there's massive layoffs, but in Canada and the US, clearly we're not creating enough jobs for the population growth. So, it's not necessarily because the economy is booming. But, you know, we've had both feet on the brake pedal at central banks for a good while now. Monetary policy is very restrictive. Likely now it's going to be time to start being less restrictive through time, because inflation seems to be on track to be tamed. There is always that phase, though, the one that we're in right now where rate hikes are over. We're starting to think about rate cuts. The economy is resilient. And you know, some observers say, well it’s different this time. The economy is much stronger and all of that. So, managing risks and emotions remains the key because you never know when volatility can creep itself back into the conversation. So, this year, economy in a slowdown, maybe a recession is not too deep but still maybe recessions in Canada and the US, more likely in Canada than in the US, I think, we can discuss that a bit later on, leading to rate cuts. And all of this gives a cocktail for maybe positive returns on equities, but a volatile year, that's for sure.

Marc: Yeah. And I think that a lot of debates will have to be about how mild or hard the recession will be. Some people are even expecting a soft landing in the US. That would be, and where it matters, by the way, and it's in some profits. You know, if I talk about the market here, you know, there's two ways you're going to make money on the stock markets: it's either you have better profits or a higher multiple on your profits. So, if you don't have better profits because you're entering a recession, what will help? You know, the multiple to increase will be the expectations of a rate cut. So why are we thinking about and discussing about, will it be a hard or a soft landing? It will really matter on profits. So that's the first part of the equation. We will probably have the multiple expansion if they cut rates, uh the central banks. But where will be our starting point will depend on how low the profit will go.

Ashleay: Okay. And let's dive into the economic story now, maybe, Sébastien, could you, uh, tell us a little bit more about what you predict will happen?

Sébastien: So, on the economic front, it's the long and variable lags from monetary policy tightening that will be in focus. So, when the central banks raise rates or they bring rates down, usually there's a delay of 18 and 24 months before we have the full impact of all of these hikes. And, well, the hikes from late 2022 that we've seen, and some from early 2023 likely will have more of an economic impact in 2024 than they've had so far. So how long will this take? How intense will the impacts be on the unemployment rate, which has already started to rise? Both in Canada and in the US, that's going to be an important question. How sustainable will the fall of the inflation rate turn out to be? That's going to be a very important question to, in the end, answer,  well, when can central banks can start to remove at least one of the two feet that they have on the brakes right now. So, this is going to be the economic and market story to follow in 2024.

Marc: And that's exactly that, you know, we were there last year, you know, one year ago thinking that the economy will slow down more than we thought. More than, you know, what happened exactly in 2023, especially in the US with that, that, you know, monster Q3, GDP of 5% annualized. So, there we are a bit at the same point, we have started to see some weakness in economic news, but we think that it's been a bit pushed out. But yeah, we're going to witness, you know, the economy slowing down, the titles, you know, at the news at 6:00, you know, when you're going to be in your living room won't be always, you know, positive. Actually, it could be bleak. We're going to hear about, you know, uh, bankruptcies. We're going to hear about people, you know, having difficulties meeting their ends, friends, families and so on. So, it's going to be a little tough. But at the same time, that's what we need to kind of reset, you know, the inflation, and actually to win the fight against inflation. And that's very important to finish that fight. And I think that central banks were pretty adamant to say we're going to win that fight and we're going to win it for good. Not, you know, just, oh yeah, it's better, so let's, you know, let's loosen the monetary policy. They really want to avoid what happened in the 70s I think.

Sébastien: Yeah. And concretely, I mean, it's always tricky to make these predictions. But you know, let's extend our necks here. The number of rate cuts that we could see in 2024, maybe 2 or 3 cuts would seem reasonable from where we are now, maybe starting around mid year in North America, very likely earlier in Europe and after that, which will extend all the way to 2025, maybe then we'll see 4 to 8 cuts in 2025. That would seem like a reasonable path if everything follows like, the template that we just discussed, if at the beginning of the year or somewhere at some point during the year, we see the economy fall off a cliff, which is a low probability scenario, but still something we need to consider, then it might move faster, but we're not expecting that rates will go back to the low levels that some investors are accustomed to in 2024-2025. Likely it's going to be a slow grind.

Marc: Yeah. And one thing that will be interesting, when we will witness those rate cuts we will have also the US elections that will probably occur somewhere in that time frame. And it's quite interesting to think, you know, what could be the impact of having, of course, a presidential election, which will, you know, gather a lot of attention. But the real thing as an investor that we are interested in is will there be a perfect alignment between the President, the Senate and the Congress, the House of Representatives in the Congress. We know that the Democrats will have a hard time keeping the majority in the Senate. But, uh, on the other hand, the Republicans, they have a very short majority at the House. So, both could flip. And depending, if we are not perfectly aligned, usually the reactions are much more tepid. If you have a perfect alignment, let's say that, you know, both houses and the presidency is Republican, then the market could rip off, you know, on that like it happened in 2016.

Sébastien: So, volatility could happen there. A year without volatility is pretty rare. But positive returns at the end of the year, I think we're pretty much agreed on that.

Marc: Yeah. Positive returns at the end of the year, sometimes it's a question of timing. You know, we cut at a precise moment. It can be three months later at the worst. I think it should be positive. I think it could be quite positive. But at the same time, you know, there's a couple of things that could, you know, change a bit. The main scenario, like I said, and for example, if the recession is deeper than we thought in the US, you know, and then, profits go down more and the Fed is not really saying what they're going to do about cutting rates. You know, the stock market could suffer for a couple of months, probably would regain at one point, when we will see the Fed announcing some kind of intention of lowering rates. But there again the timing will have a huge importance, so. But yeah, overall I'm pretty confident.

Ashleay: And just to circle back real quick, Marc, you mentioned something that happened in the 70s. For those that are not aware, it was insane interest rates, right? On housing?

Marc: Yeah. What happened exactly, and it's interesting, in the 70s, we had that huge spike in inflation at the beginning of the 70s. And then the central bank, the Fed, raised rates, but they lowered them too fast. And then inflation that went down picked up again. And it was really ingrained in the economy. So, we had to witness, you know, the interest rate going to the 20s on the mortgage market. And it was Paul Walker at that time that really said, we're going to win the fight against inflation, but it's going to cost us a lot. And that's exactly what happened, I remember my parents paying 20% on the mortgage.

Sébastien: Yeah, it's hard to imagine paying credit card type interest rates on your mortgage.

Marc: And we cannot witness that because, you know, at that time the level of debt in the economy was much, much lower than what it is today. We cannot afford that kind of situation. It won’t fly. I mean, the whole economy will be in a disaster. So they have to make sure that the inflation will be tamed for good. So that's I think something that we have to keep in mind.

Ashleay: Very good. Well, that concludes part one of this podcast. Please stay tuned for part two. And Marc, thanks again for joining us. And, as always, thank you, Sébastien, for your expertise as well. We hope you found the information interesting and that it helped you to better understand the tough choices that our governments will have to face to keep their economies afloat. We'll talk to you next week for part two. 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.