Dear customers, 2023 has brought its share of financial challenges and I know many of you have felt it. The markets have been yo-yoing, causing as much stress on your investment portfolios as they do on your personal life. My role, as a planner, is to keep a watchful eye to ensure that your investments are invested in a way that meets your needs while trying to beat inflation. Also, I make sure to keep you informed on economic news, all in order to increase your financial knowledge. Today, at the beginning of January, here is a look back at the global economy of 2023.

To better understand the movements of 2023, we must first understand the triggers.

  • 2020: The virus hits and markets fall by 35%. All sectors are affected and affected. Individuals no longer have the same expenses and this allows some to make major savings.
  • 2021: Central banks are doing everything they can to bring things back to normal. We are seeing historic cuts in key rates, allowing for favourable conditions for the economy. Canadians’ savings rate is rising. Slowly, the economy is returning to its normal curve. People can buy homes, pay for travel, all thanks to competitive borrowing rates, but also thanks to their increased savings. The economy is recovering at a faster speed than expected.
  • 2022: The effects of the past few years are being felt. The reduction in key interest rates was beneficial for the economic recovery, but it did not remain without an impact on inflation. We are seeing phenomenal increases in inflation, reaching up to 8% over the course of the year, forcing global banks to revise their policy rates upwards.

The year 2023 has been a time of uncertainty and fluctuation in global markets, with significant developments in every economic region. This article examines the key trends and events that have marked various markets around the world.

First Trimester

For both Canada and the United States, the year seems to be off to a great start. Inflation is gradually slowing while markets are making gains. The economy is more resilient than we might have thought, which brings a wind of optimism and kicks off the year on a very good note.

Canadian Markets

This wave of optimism at the beginning of the year was only temporary. By the end of January, the wind seems to be pushing in the opposite direction. We are experiencing the first increase in the Canadian policy rate, by 25 basis points, bringing it to 4.50%. This was the only increase during the quarter. On the other hand, the Bank of Canada reaffirms its commitment to stability while signaling the possibility of future increases to meet its inflation targets.

During this quarter, we also learned that the minimum wage will increase to $15.25/hour as of the beginning of May.

U.S. Markets

The first part of the year was marked by frequent adjustments in policy rates in response to employment data, persistent inflation and financial market conditions. The first hike was 25 basis points in early February, bringing the rate to 4.75%. This is not the only one to occur this quarter, another 25 basis point hike took place in March, bringing the rate to 5%.

According to a study conducted by brokerage firm Redfin, the U.S. housing market has seen its largest decline since 2008. In the U.S., it is pertinent to highlight the possibility of obtaining 30-year fixed mortgages. With the decrease in interest rates in recent years, this has led to an increase in the number of people who can obtain a mortgage at an advantageous rate of 1 to 2% over a period of 30 years. However, when a significant rate increase hits, people with good rates who want to sell will lose that advantage and it slows down people’s desire to sell and buy a home.

The end of the quarter sent shockwaves through the United States when Silicon Valley Bank went bankrupt. Due to a lack of liquidity, due to a bank run, the institution had to declare bankruptcy. This led to a great deal of fear, as some believed that the events of 2008 were being revisited. It is important to note that with this incident we were not reliving the events of the past. This bank had taken bad investments and will only be a page in the history of something not to be repeated.

European Markets

It’s been a quiet start to the year for European markets. The message remains the same as last month. Recession is not in sight for the winter of 2023. The economy is slowing, but remains optimistic that it should still have a better year in 2023. In addition, the economy is once again proving its resilience in the face of the war in Ukraine that is affecting all of Europe.

Emerging Markets

Finally, for emerging markets, we see a slightly positive curve on their side. With the reopening of China at the beginning of the month, this is not only positive for them, but also for other countries. All of this will allow the country to regain its strength after periods of uncertainty.

An important thing to note is that when the policy rate is raised, it takes 18 to 24 months before you feel the full effects of the increase. It will therefore be some time before we see the effects of the downturn on the various facets of the economy.

Second Trimester – April to June

Canadian Markets

The year continued its tumultuous journey in the second quarter. We get the employment data, as well as the wage data. Against all expectations and predictions of experts, they are on the rise. While unemployment figures remain unchanged, 5% in Canada and 4.1% in Quebec.

During the first two months of the quarter, no increases, the Bank of Canada maintained its rate, reiterating that the objective is to return to the inflation target. Inflation continued to show signs of persistence and the economy held up stronger than expected, forcing Bank of Canada economists to raise the policy rate by 25 basis points. The rate at the beginning of June is now at 4.75%.

U.S. Markets

It was an eventful quarter in the United States. The impact of the Silicon Valley Bank collapse is still present when another local U.S. bank suffers the same shock. This time, it was the First Republic bank that succumbed. Just like the collapse of Silicon Valley Bank, it is a specialized bank and it is not a reflection of the events of 2008.

There was also another increase in the policy rate in May. Another 25 basis point increase bringing the rate to 5.25%. The last time the policy rate was this high was in 2008.

The topic of the day was the question of the U.S. debt ceiling that would be reached between June 6 and June 14. We explained to you at the time that it was important to take into account that this was not the first time that the U.S. Treasury had reached its ceiling.

Since 1960, this cap has been revised 78 times, 49 times under the Republican presidency and 29 times under the Democratic presidency. If there is no raising of the debt ceiling, it could have an impact on old age and military pensions, the financing of the health system, the salaries of their government employees, etc. On the other hand, it is much more seen as a political game than an economic one. History reflects this, although both parties want to take advantage of the situation according to their agenda.

In the end, as in the past, the two parties reached an agreement and the U.S. debt ceiling was raised.

European Markets

Uncertainty is still present, but European markets are much more resilient than economists might have expected given the ongoing Ukraine-Russia war. The winter went better than expected and government support to stay on track with the inflation target allowed this market to continue to avoid recession and stay strong despite volatility around the world.

Despite the efforts, the effects of the Ukraine-Russia war have begun to be felt on the side of Germany which has announced that it has entered a technical recession, meaning that 3 quarters of GDP decreases, without an increase in the unemployment rate.

Emerging Markets

Since the reopening of its borders, China has been moving at a slower pace. The post-pandemic effects are being felt in a decline in exports. All of this will have an impact on the labour market, where the highest unemployment rate for 16- to 24-year-olds has been recorded. This is a generational shock.

Third Quarter

Canadian Markets

The summer season was marked by another increase in the key rate in July, again by 25 basis points, bringing the key rate to 5%. You have to go back to 2001 to find such a high rate. This increase is not unanimously welcomed by economists. Some believe that this is one increase too many, but as we told you above, we will have to wait between 18 and 24 months to see the full impact.

On the real estate markets, rising interest rates are being felt. The latter is one of the first to be affected by the increases. In August, home sales fell 4.1%. On the other hand, the 12-month situation remains optimistic with a 5.3% increase in sales over 12 months.

On the inflation side, we are starting to see signs of running out of steam, which has slowed to 3.3%. However, we should not declare victory too quickly, as the Bank of Canada tells us that it would be prepared to raise the policy rate if necessary.

U.S. Markets

Like the Bank of Canada, the Fed made the decision over the summer to raise its key interest rate once again. The highest rate in 22 years is now 5.5%. Fed Chair Powell reminded us that we need to be firm to get back in balance and achieve the inflation target. The U.S. agrees with Canada on one thing: inflation targeting remains the number one priority. Therefore, until things get back to normal, rates won’t go down. This is the speech we have heard the most this year and which we have been reminded of during this quarter.

In addition, during this quarter we saw an 11% increase in the price of oil. The effects of such a large increase is a reduction in the purchasing power of individuals. It also drives up the prices of goods due to the transportation of those goods. This is reflected in the rise in the consumer price index to 4.7%. In this time of constant change, Americans seem to be slowly but surely recovering, and all of this is reflected in an increase in retail sales.

European Markets

The European Central Bank, the world’s second-largest central bank, raises its key interest rate to 4%. This is at its highest level since 1999. Inflation expectations remain elevated, which explains the increase in this rate. The repercussions of such an increase are being felt very quickly in the private sector. In addition, a sharp deterioration in the manufacturing sector continues, bringing the Purchasing Managers’ Index (PMI) to its lowest level in 30 months. These figures reinforce economists’ predictions that Europe could enter a recession by the end of the year. We already know that Germany is in a technical recession, Europe could follow closely.

Emerging Markets

China has been booming in the first few months of 2023, following the removal of post-pandemic rules. As pent-up demand due to the pandemic returns to normal, growth appears to be slowing. This translates into a decrease in job opportunities for young people. The unemployment rate for 16- to 24-year-olds hit an all-time high in June at 21.3%. We could not obtain more recent data because China’s National Bureau of Statistics has stopped producing and publishing these data.

Fourth Quarter

Canadian Markets

The Bank of Canada has chosen to hold on to rates, avoiding any hikes. The rate remains stable at 5%. Inflation, on the other hand, persists. We get the data from the last few months, showing that inflation has remained between 3.5% and 4%. This trend makes it increasingly difficult to decide whether to raise the policy rate. Andrew Grantham, Managing Director and Senior Economist at CIBC, said: “The data shows that inflation has slowed. This, along with the poor economic growth we have witnessed, should convince the Bank of Canada to maintain its policy rate, not just for this month, but through the end of the year and even early next year.” As has been the case, we will not see another rate hike for Canada at the end of the year.

At the end of the year, the unemployment rate is rising, now at 5.5%. In a recession, the unemployment rate is around 7%, so we might think we’re heading in that direction, but that’s not the case yet. The other recession indicators have yet to manifest themselves, so the next few months will be crucial in anticipating future trends.

U.S. Markets

Fed Chair Jerome Powell stresses the need for caution in the coming months. That’s the message from his recent announcement that inflation rates in the U.S. will remain too high. He says the main objective remains to bring inflation down to 2%, while reassuring the population that the measures taken are soft, always with the aim of avoiding causing a recession. The success of this approach remains unclear, and economists have differing views on the outcome.

GDP is holding steady on the U.S. side, however, it is important not to declare victory too soon. Historical data show that following significant increases in policy rates, GDP rebounded and then declined. It is imperative to remain vigilant on this front to obtain more accurate information.

European Markets

In the euro area, we are seeing a stagnation in loans to households and businesses, a common phenomenon during periods of recession, according to the National Bank. According to their forecasts, the European economy is expected to contract around 2024. As we mentioned last month, the outlook for the euro area remains unchanged.

In addition, a marked slowdown in manufacturing activity is being felt, reflecting the early effects of economic tightening. Eurozone GDP contracted in the third quarter, pointing to an impending recession.

Emerging Markets

China is doing everything it can to avoid a deflationary spiral. On October 24, China issued an additional 1,000 billion yuan of government bonds to implement stimulus initiatives.

Stock Market 2023

In 2023, despite predictions, markets unexpectedly rose from January to June. This rebound in the economy has allowed us to slowly turn back the path towards the 2020 figures. This was followed by stagnation until October, when we suffered another market drop due to the profit-taking of the various institutions. Subsequently, we saw a rebound in the economy in the month of November where we regained the mid-year gains. All of this gives us hope for the year ahead.

Here’s an overview of the 2023 markets

*Year-end inflation predictions were 3.3%

As we have told you throughout this news review, but also during the year, it takes between 18 and 24 months before it feels the full effects of inflation. This means that at the end of the year, we still have 43% of the impact of rate hikes that has not yet been felt in the consumer market.

Looking ahead to 2024: What can we expect?

Whoever will be able to predict the movements for 2024 will be very clever. If you remember what economists said as well as mine at the beginning of 2023. We were very unoptimistic about 2023 on the financial markets. That being said, we’re still going to indulge in the game for the year that has just begun.

Here are several news items that have been in our financial environment for almost 2 years:

1. Recession

Will we see a recession on the horizon in 2024? Or will it be more of a soft landing? With central bank policy rates set to fall for the next few months, it is highly likely that the worst is behind us. Employment indicators show no signs of recession. The unemployment rate is not at the usual level when a recession occurs, quite the opposite. We are talking about full employment in both Canada and the United States.

2. Volatility

The years follow one another and are similar in this respect, I can confirm it. Markets have been very volatile in 2023 and will remain so this year. The 2023 gains were seen more as reversals of losses from the year 2022. That’s positive, that’s for sure. But we must not forget this point when analyzing our portfolio. However, it will be necessary to remain cautious and diversify well across the different asset classes and geographically as well.

3. Inflation and the policy rate

According to the chairman of the US Federal Reserve (Mr Powell), we should not wait until inflation has returned to its 50-year base rate (2%) to start cutting rates. Let’s face it, at last, an encouraging speech! Since mid-2022, there has been more than just talk about rate hikes, inflation and recession. In short, the fight to beat inflation will continue in 2024, but at least it’s reassuring to see that the expected results of rate hikes are on the horizon. It should also be understood that it is easier to go from an inflation rate of 7% to 3% rather than from 3% to 2%. The fight is not over but we are on the right track. In my 2023 economic update, we predicted that inflation would be more at the 3-3.5% level by the end of 2023. This is the case and we are optimistic about the future.

Good news for all! We expect policy rate cuts in 2024. In fact, the U.S. Federal Reserve is forecasting 3 rate cuts. The market predicts 6. If we could be somewhere in between, it would be very satisfying. More money in our pockets is never to be neglected.

4. Opportunities

Question: What will be the opportunities and where will they be in 2024? Once again, it’s hard to predict the good things in 2024, but we still have some clues.

Fixed income versus lower rates

So much in 2023 we knew that rate hikes were going to hurt this asset class significantly, now it will be the opposite for 2024. In fact, declines will lead to gains in bonds and fixed income.

Explanation: When there is a drop in the interest rate, the bonds, in addition to receiving their quarterly coupon, will also receive capital gains. It will therefore be more attractive to leave guaranteed investments and return to bonds. So, in the coming year, we will recommend favouring a portfolio that leans more towards bonds and less towards guaranteed investments. This leads us to overweight the bond yield by around 5-10% in view of future rate cuts.

Yields on guaranteed investment certificates have been attractive for the past 1 year due to the rise in interest rates. If there has been a benefit to these increases, it is on this side. In my 23-year career, I have rarely seen such a high rate. On the other hand, with a glimpse of future declines, GICs will be less attractive. The only use will be the security of the wallet.

Equity Markets

Again, equities should be considered at the Canadian, U.S. or international level. Even if we believe that Canada should be preferred because we are in control of our economy in almost all sectors, we will have to diversify geographically to obtain the effect of the exchange rate, which can be very interesting.

In good portfolio strategies, diversification should be as follows:

  • Different asset classes (fixed income-equity-dividend)
  • Geographically (Canada – U.S. – Europe – Emerging Market)
  • Different portfolio manager to achieve a difference in mentality and strategy in the management of their funds.

Considering all these points, caution remains the order of the day, but we are optimistic for the year 2024.

In conclusion, as we close our review of economic news, we hope that we have been able to clarify, in simple terms, the evolution of the economic events of 2023. For our part, we continue to follow up and inform you of any changes. If you have any questions about your financial situation, don’t hesitate to make an appointment with one of our advisors who can help you.