As always, the market will ‘do what makes the most people wrong.’ Looking back at strategy reports from a few months ago, the consensus for the year was notably muted. Most had been expecting single-digit equity returns and a more cautious economic outlook. The big theme in the bond market centred around rate cuts – expecting six – and predicting that yields would fall dramatically.
Yet here we are in April, and the bond market has adjusted down its expectations, pricing in two to three rate cuts. Bond yields are now at higher levels than when we started the year. If you had given someone those two pieces of data and asked them to make a bet on the equity market, most would have been very defensive, and maybe a few would have shorted some of the more speculative parts of the market. After all, for the last few years, the direction of yields has set the tone for equities, with higher yields acting as a drag on markets and risk assets. However, those relationships seem to have broken. Bond yields have gone higher, and equity markets are now at all-time highs after the best quarter to start a year since 2019.
Recession fears for the US economy have disappeared. Much like how we finished last year, AI remains the dominant theme. And while Nvidia and other semiconductor names continue to race higher, it's very encouraging to watch how other sectors are now joining the party and moving higher. Last year, equity returns were very narrow and dominated by the so-called ‘Magnificent 7,’ but that has changed. It started with energy, as everyone suddenly realized these data centres required power. But now that is spilling over to Copper and other commodities as a play to wire the servers together and build power lines. Even the banks are moving higher, with many hitting all-time highs. That is commonly known as a Bull Market.
But it's not just equities that are moving higher. All assets are moving. Gold has broken out to all-time highs, even in the face of a higher US$. And the ‘digital gold’ of Bitcoin is up almost 100% year to date, racing to $70k on the back of the US spot ETF and excitement over the halving which will happen in April.
Putting it all together, you couldn’t have asked for much more from this quarter. Markets will climb the ‘wall of worry,’ and that has been the case. Equity markets around the world, along with commodities and crypto, are at all-time highs. Which should cause investors to question what we were so worried about a few months ago.
However, it’s not the time to blow the “all clear.” Even with all the good news, markets continue to expect rate cuts this summer, which will open themselves up to disappointment if those do not occur. While the American economy continues to rock, other places in the world, including Canada, are not in as strong a position. Recession odds have fallen, but they haven’t fully gone away; a recession could be more delayed than cancelled.
We continue to think equities will see their highs in the first half of the year as there is no way the US election will not cause uncertainty, which markets hate. That is contrary to the traditional pattern during an election year, which is often sideways until the election and then vaults higher after election results.
The next quarter should see much of the same things we experienced this year. Inflation and payroll numbers will remain key indicators of market direction. Geopolitics remains an unknown risk that markets have largely ignored, yet it could flare up at any time. Further tensions in the Middle East that send crude oil prices higher could quickly derail the good news story of inflation falling.
Corporate earnings may have been the most positive surprise for many. Consumer demand has held despite fears, and margins have not faded. As we enter the next earnings reporting season, we will continue to listen for signs that this trend is shifting.
Equity markets have touched or exceeded many year-end targets. The good news is that it happened for the right reasons, with earnings higher and recession fears fading. Many were underinvested to start the year and are now chasing to deploy capital. But this is where it gets tricky. Complacency is setting in for many, and ‘bearish’ sentiment is near the lowest level in years. With many investors lagging benchmarks, the ‘pain trade’ is higher. Seasonality remains positive for the next month, but everyone needs to remain alert for any change of tone that could cause some volatility.
— Greg Taylor, CFA, is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
By the numbers displays total returns for the month of March 2024. The content of this document is for informational purposes only and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.