Charting Economic Horizons: 2024 Outlook and Analysis
Welcome to our first economic update of the year. In this report, we delve into the current state of the U.S. economy and its global impact, highlighting key indicators and emerging trends. Despite persistent inflationary pressures, the U.S. economy demonstrates resilience, with noteworthy developments in inflation trends, job market dynamics, and wage growth. Additionally, we explore the significance of diversification strategies in light of the rise of the "Magnificent Seven" stocks and analyze geopolitical developments affecting global markets.
2024 Economic Data Update
In the U.S., the economy's resilience challenges expectations of a smooth disinflation process, with services inflation persisting above four percent quarterly. January's consumer price index (CPI) rose by 3.1% year-over-year, exceeding economists' 2.9% forecasts, while job additions surpassed expectations at 353,000, and wages increased by 4.5% annually. The moderation in headline price growth primarily stemmed from reduced energy prices, while grocery prices saw a slight uptick. Despite these positive indicators, concerns over inflationary pressures persist, prompting a shift in expectations for rate cuts from 4 to 6 starting in March to possibly 3 or 4 commencing in June or July. Morgan Stanley's chief U.S. economist predicts an inevitable hard landing due to multiple interest rate hikes, while JPMorgan's CEO and Goldman Sachs's CEO caution against overly optimistic views regarding the Fed's ability to manage inflation. Amidst these economic dynamics and cautious forecasts, the soaring market trends underscore a potential peril of irrational exuberance, urging a tempered approach amidst the prevailing uncertainties.
The Rise of the Magnificent Seven and Diversification Strategies
In 2023, the S&P 500 equal-weighted index (SPW) experienced notable momentum, particularly driven by seven influential stocks that significantly impacted the benchmark S&P 500 index due to their substantial size. While Tesla and Apple faced declines so far this year, Amazon stood out with a remarkable 16% gain in 2024, although it has yet to reach its 2021 peak. On the contrary, the remaining members of the "Magnificent Seven" – Nvidia, Meta Platforms, Microsoft, and Alphabet – reached new record highs. This esteemed group of technology giants collectively boast a market capitalization of approximately $13 trillion, comparable to the stock exchange of a major country. Notably, Microsoft and Apple individually match and surpass the market capitalization of entire stock exchanges in countries such as France, Saudi Arabia, the U.K. and Canada. The Magnificent Seven contributed significantly to January's S&P 500 return, accounting for 45% of it, and, excluding Tesla, they contributed to 71% of the benchmark index's gains. Despite this, the SPW has been underperforming compared to the cap-weighted S&P 500, with the SPW to S&P 500 ratio nearing pandemic lows. This concentration in the U.S. stock market has led to comparisons with historical episodes such as 2000 and 1929, reflecting unprecedented levels of concentration. Given the observed trends, it may be strategic to sell positions in the Magnificent Seven and shift investments towards the S&P 500 equal-weighted index, aiming to diversify portfolios and mitigate risks associated with concentrated holdings in theses elected stocks.
Geopolitical Developments
The ongoing tensions between Israel and Hamas have forced ships to avoid the Suez Canal, significantly affecting container freight rates, particularly between China and Europe, as well as China and the U.S. Meanwhile, the conflict in Ukraine has caused humanitarian crises, with many developing nations still grappling with food shortages. As a major exporter of agricultural goods, Ukraine's turmoil disrupts supply chains, exacerbating food access issues globally. Although energy prices initially surged due to speculation following the Israel-Hamas conflict, they have stabilized, as the conflict does not significantly impact oil production. Despite this stability, food inflation persists in many countries, driven by challenges in production, processing, pricing, and economic policies at the national level.
China's Economic Struggles in 2023
China's economy faced challenges in 2023, recording one of its weakest performances in over three decades with a growth rate of 5.2 percent. Concerns linger over a protracted property crisis, sluggish consumer and business confidence, and weak global growth. Plummeting real estate prices, defaults by major developers like Evergrande, and record youth unemployment contribute to the ongoing turmoil. Authorities are implementing support measures, including lowering mortgage rates and reducing cash reserves for banks, to stabilize the market. They are also considering using state-owned companies' funds, totalling around 2 trillion yuan ($278 billion), for this purpose.
Housing Market Dynamics in Canada and the United States
In 2023, residential sales fell in Quebec across all property categories, reaching a total of 75,853 transactions, as indicated by statistics compiled from the Centris provincial database of real estate brokers. This is a decrease of 13% province-wide, or 10,995 fewer transactions than in 2022.
In Canada, home sales rose by 3.7% in January, following a 7.9% surge in December, attributed to declining mortgage rates. New listings increased by 1.5%, marking the first gain in four months, indicating growing seller confidence. Year-over-year, home sales surged by 22.0%. In the United States, the housing market grew substantially, adding $2.4 trillion in value, reaching $47.5 trillion. Despite high mortgage rates, home prices in the top 20 metro areas rose by 6.7%, while nationally they increased by over 5%, contributing to a shortage of available properties due to hesitant sellers.
Conclusion
In summary, the final quarter of 2023 showcased remarkable resilience in the corporate with robust balance sheets, sustained performance by Big Tech giants, and stable operating margins despite prevailing uncertainties. Corporate America concluded the year on an unexpectedly strong note, with growth nearly eight times higher than initial expectations. However, lingering questions persist regarding the spectre of a looming recession and its potential impact on the stock markets. Concerns mount over increasing debt levels in nations and early signs of vulnerability among individuals. Amidst this backdrop, our investment strategy remains focused on markets we understand well such as North America, Europe, and Asia, with particular emphasis on undervalued stocks and commodities like gold, silver, and copper. The bond market presents an attractive option, offering returns of 5% to 7% with lower risk compared to equities, leading to an overweight allocation towards cash and bonds. Despite exercising caution, we remain vigilant in identifying opportunities in the equity market while eagerly anticipating the decisions of central banks, which have been pivotal in shaping market dynamics since the onset of the pandemic in 2020.
With over 35 years of combined experience in wealth management, navigating various market cycles, our team excels in making strategic investment decisions that optimize value and provide robust safeguards against potential downturns. As always, we remain committed to providing unwavering support and guidance, ensuring that any questions or concerns are promptly addressed to uphold our commitment to your financial well-being and thank you for entrusting us with your financial goals.
The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly-owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).