Ashleay: Hello and welcome to the In Your Interest! podcast. My name is Ashleay and today we're back in the studio for the second part of our look ahead to 2024. We have our guest, Marc Gagnon, portfolio manager for North American Equities, and of course, my colleague Sébastien Mc Mahon. So today we'll continue talking about 2024 forecasts for financial markets. So hi, both of you.
Sebastien: Hello, Ashleay.
Marc: Hello, Ashleay.
Ashleay: Alright. So, if we continue our discussion from last week, how do you both see 2024 unfolding and how should the markets behave through it all.
Sébastien: Yeah, sure. The behaviour of the markets in 2024 could be interesting. So, at the end of the year, I think we're pretty much both agreed that we should have positive returns when it’s all said and done. But the road there could be interesting. So, one study that we like to look at, which covers more than 100 years of data, suggests that usually when the Fed starts cutting rates, after that, we tend to see the markets make a bottom. So, the moral here is that not every market is the same, every environment is different. But it's not because the Fed starts cutting rates that all of a sudden volatility disappears from the market. We can still have some bouts of volatility through the year. So, you know, keeping your emotions in check will be important this year. Having a strategy for the long run, staying in the market, staying diversified will be very important. But it's not because we expect a positive year that necessarily means that we'll have a year that is without volatility.
Marc: Yes. And we discussed the last session, Sébastien, how sustainable the decline in inflation has to be because we know that the different central banks, they don't want to fight the inflation dragon again, you know, in a couple of months or in a couple of years. So, what I could envision and that could be fun is, let's say we have a couple of good news on the inflation front and then the market, you know, starts like, especially the stock market, it rises, you know, very strongly. And then, it stops and whoa, is this going to be sustainable? And will it stay like that? So, then the market will go down. And oh! Okay, a couple of other negative news, for example, on the economy, the market will rise again. So, a lot of this stop and go, you know, that's exactly a definition of a market that is always like, uh yeah, no, maybe, I'm not sure. But at the end, ultimately, when you go through all these ups and downs, that's very difficult for, you know, the average investors and even the professional ones. We should have an interesting year for the stock market.
Sébastien: And two important stories to follow. This year is an election year in the US. For reasons, you know, that make sense or not, the market tends to be mostly positive those years, 83% of the election years since 1928 have been positive, with an average return of 11.3%. So that's just a long term stat. That doesn't mean it's going to be happening this year, but let's say the odds are on the side of the US stock market. But on the other side of the equation, you have high multiples in the US. So, the US stock market seems more expensive than let's say outside of the US. So, we could also see, you know, money always moves from one market to another. So, we could see, uh, investors taking money out of the US stock market and going elsewhere. Maybe that could put the brakes on the US stock market.
Marc: That's a possibility. But I would like to say about that, though, that the evaluation of the US market, when you remove those magnificent seven that we talked about last week, the valuation falls significantly, or significantly enough to be close, you know, to a normal valuation. And when I take those magnificent seven that are a bit expensive, but I look at the growth in profit, they're not that bad. So yeah, the US market might be a bit overvalued, but not to the extent that we can clearly say to, at least to my point of view, that it's not going to perform, you know, maybe the other market will be more, you know, on average, they will look more alike in terms of return. Maybe, for example, the Canadian market will have a performance much closer than the US market this year, but, yeah, no, that's something that will be important, interesting to watch.
Ashleay: And do you guys have any bold predictions to make? Anything that's unlikely to happen, but could still make a difference this year?
Sébastien: Maybe I can go first here out of courtesy. Let me say something that might be wrong first. So, I think this year the bonds might outperform the US stock market. In 2023 we also did expect a strong year from bonds, didn't really materialize, as we're recording this we’re mid December and bonds are in positive territory for the year but, you know, trailing the US stock market which is much stronger. So, in 2024 if we do have some volatility coming from the economic picture, if we have the rate cuts that are starting to happen or even to be hinted at, we could have lower interest rates all across the curve and have a strong year for bonds, which would outperform equity. So, it's not a common occurrence to see that. But I think your 2024 could be one such year.
Marc: Yeah it is. It's very interesting, because I think we're going to pick a little fight here Sébastien, not a big one but a little one. So let's start with the part I agree with. I think that bonds can do, you know, better than stock. But that's where it ends. I want to add a couple of things that will make it a bit different in terms of expectation. I think it's going to do better for the first month of the year, when the recession will hit a little harder and we're not going to be sure what's going to happen to profit. But after, I think that when rate cuts will happen, it will trigger a powerful, you know, reason to buy stocks. I think that the long-term bonds will be already, you know, down enough that there will be money flowing from bonds to equity. And ultimately, I think that at the end of the year, when we're going to measure everything on December 31st, stocks will do better than bonds. Maybe you're going to say, I'm talking about my, you know, my business. After all, I'm a stock portfolio manager. But yeah, I believe that stock will do better than bonds in 2020.
Sébastien: No, it could completely be possible too. Maybe I'll make a second one, a second bold call just to raise the odds of being right on at least one thing here. If we do have a recession in 2024, that means that when the recession ends, there's a new economic cycle and maybe even a new bull market that will rise from the ashes and usually at the beginning of economic cycles one currency that does pretty well is the Canadian dollar. So, I would not be surprised if at the end of the year, the Canadian dollar is one of the best performing currencies, maybe all the way to $0.78 to $0.80 on the dollar. Right now, it's about $0.73. So that could be a very important factor in everyone's portfolios.
Marc: Oh, that is music to my ears, Sébastien. Because you know that as a Canadian portfolio manager, you know, when the Canadian dollar is doing well, it means that usually commodities are doing well. And, you know, Canada is still well exposed to energy, base metal and so on. So, it means that the Canadian market should also do well. And, you know, that joins one of my anticipations or forecasts, that the Canadian market will have an interesting year in return. I think that the chances are fair that we will beat the US market. Maybe not by a lot, like I said, but yeah, it's good. It should be a good year for the Canadian market.
Ashleay: Alright. And if, you know, last question. What would have to happen at the start of the year for you to go back to the drawing board on your forecast?
Sébastien: Yeah, that's an important question. So, what's the bedrock here of our view? I would say that if, well, two things: one positive, one negative. The positive one is if China decided, the administration over there decided to just change the strategy and just to, you know, support growth in the short run and just, you know, kick start the economy—that could have an impact on global growth, that could have an impact on global inflation, and that could delay the rate cuts that we've been talking about here. And maybe that's not going to be as positive for equities or for risk sentiment if it happens. So, the optimistic scenario on the economy side could be negative for the markets. And the reverse would be, when recessions strike usually they strike quickly. You know, you expect them. They don't come and then suddenly boom it's there. If we have a stronger pull back on the US economy, maybe that would create some volatility at first, pushing for more rate cuts, much deeper rate cuts. And what we've talked here, maybe the US stock market will behave much better than what we just discussed.
Marc: Yeah that's too, a clear risk that I see also. I would add one: because I think that it's, all that situation started from too much inflation. It's going down, it's going down well, it’s going down, you know, in some countries faster than others. But they’re all, you know, seeing inflation going down. If that, you know, movement stopped for whatever reasons, or inflation starts to be stable, that's where we can run into some problems because, as we said already, it's important for the central banks to not fight the dragon, like I said, that beast, the beast being inflation, again too soon, a couple of months and a couple of quarters. So, they will want to make sure that we are winning that fight for good before lowering interest rates or cutting the Fed funds, for example, for the Fed. So, we have to make sure that it will continue to go down that way. To me, that's an important thing to watch for that could you know, shuffle again all the cards in the deck.
Sébastien: Maybe a question for you, Ashleay, just to surprise you here, since you’re the resident geek, is this the year that artificial intelligence takes over the world?
Ashleay: Oh, boy, I hope not, because we’re not ready for Terminator. But, you know, I am a big fan of, you know, ChatGPT and whatnot, so who knows? Who knows? Everything went so quickly last year. So maybe it will be the year.
Sébastien: Or the year of the metaverse.
Ashleay: Oh, that would be kind of cool too. Yeah. Alright well, that's the end of our episode on stock markets and predictions for the year 2024. We hope you found the information interesting. And of course, thank you, Marc, for accepting our invitation. And thank you, Sébastien also, as always. And to our listeners, we will see you next week. 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.