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Posted by Greg Taylor on Apr 1st, 2024

Resilient Markets and Tempering Expectations

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.

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Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.