Global economic momentum continues to improve with mixed results among the G7. The U.S. FOMC met in early June, focusing on inflation that has remained higher than target, supporting the position to leave rates unchanged. The Bank of Canada and European Central Bank, however, began rate-cut cycles in June; the first G7 central banks to do so. While the Canadian economy will benefit from interest rate relief, overall economic momentum is forecast to remain subdued as indebted consumers continue to adjust. In June we maintained our U.S. twelve -month forward looking outlook to reflect our view for Stagnation (U.S. Real GDP growth between 0 and 2.5%) over the entire period. Stagnation will put downward pressure on rates, as moderating inflation will lead to less restrictive monetary policy.

The Consumer Price Index in China decreased 0.10% in May of 2024 over the previous month to 0.3%.¹ China’s surveyed unemployment rate stood at 5%, unchanged from April’s five-month low.² China’s trade surplus widened to USD 82.62 billion in May. Exports advanced 7.6% from a year earlier, while imports increased by 1.8%.³ The Eurozone economy expanded 0.3% on quarter in the first three months of 2024, recovering from a 0.1% contraction in each of the previous two quarters.⁴ Annual inflation in the Euro Area increased to 2.6% in May 2024 from 2.4% in each of the previous two months. Prices rebounded for energy (0.3% vs -0.6%) and rose faster for services (4.1% vs 3%).⁵ The unemployment rate in the Euro Area was 6.4% in April 2024, down from 6.5% in each of the prior five months. Across the major Euro Area economies, Spain continues to grapple with the highest unemployment rate, standing at 11.7%, followed by France at 7.3% and Italy at 6.9%. In contrast, Germany recorded the lowest rate at 3.2%.⁶

It was confirmed that the U.S. economy expanded an annualized 1.3% in Q1 2024, mainly due to a downward revision in consumer spending.⁷ The annual inflation rate in the U.S. slowed to 3.3% in May, the lowest in three months.⁸ The unemployment rate in the United States rose to 4%.⁹ The trade deficit in the U.S. widened to $74.6 billion in April 2024. Imports increased 8.7% to $338.2 billion while exports edged up 0.8% to $263.7 billion.¹⁰ The Canadian economy was confirmed to have expanded by 0.4% in the first quarter of 2024.¹¹ Canada’s annual core inflation rate accelerated to 1.8% in May from April’s three-year low of 1.6%.¹² The unemployment rate in Canada rose to 6.2% in May from 6.1% in the earlier month, the highest since October of 2021.¹³ 

U.S. Large Cap equities posted their best performance since February, up 5.0% in May. Mid- Caps and Small- Caps were up 4.4% and 5.0% respectively. Canadian equities finished the month on the upside. The S&P/TSX Composite increased 2.8%. The S&P Europe 350 was up 3.5% in May to extend its YTD gain to 10.9%. All 16 countries contributed positively to the pan-European equity return, with Switzerland the biggest positive contributor, up +0.9%. Pan Asia equities rebounded along with global equities, with the S&P Pan Asia BMI rising 1.6% in May. Emerging market regions of the S&P Pan Asia BMI continued to outperform their developed counterparts, widening their year-to-date return differential to 5%.

In June we maintained the asset allocation from May. Due to an underperforming Canadian economy, we continue to avoid Canadian exposure as we expect the BoC to cut interest rates earlier and more than the Fed this year. We continue to focus on short duration U.S. fixed income exposure across all models. Gold is held across all models as a long-term strategic asset as it will continue to benefit our portfolio models during stagnation.

 Fiscal policy and electoral cycles will continue to dominate our outlook. Our twelve- month forward outlook focuses on the size and scale of the U.S. budget deficit, coupled with the substantial Treasury debt issuance required to address it. We will continue to monitor this as we move through 2024. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ Trading Economics. China Inflation. June 12, 2024.

² Trading Economics. China Unemployment. June 17, 2024.

³ Trading Economics. China Trade. June 7, 2024.

⁴ Trading Economics. EU GDP. June 7, 2024.

⁵ Trading Economics. EU Inflation. June 18, 2024.

⁶ Trading Economics. EU Unemployment. May 30, 2024.

⁷ Trading Economics. U.S. GDP. May 30, 2024.

⁸ Trading Economics. U.S. Inflation. June 12, 2024.

⁹ Trading Economics. U.S. Unemployment. June 7, 2024.

¹⁰ Trading Economics. U.S. Trade. June 6, 2024.

¹¹ Trading Economics. Canada GDP. May 31, 2024.

¹² Trading Economics. Canada Inflation. June 25, 2024.

¹³ Trading Economics. Canada Unemployment. June 7, 2024.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 31, 2024. Index performance is based on total returns and expressed in the local currency of the index.

Markets anticipate easing policies from major central banks starting in June, driven by ongoing inflation normalization and a shift toward recession prevention. For Canada, we look for a first cut in June compared to the first expected move from the Fed in December as higher interest rates are having a large impact on the Canadian labor market. In April we maintained our U.S. twelve -month forward looking outlook to reflect our view for Stagnation (U.S. Real GDP growth between 0 and 2.5%), over the entire period. Stagnation will put downward pressure on rates, as moderating inflation will lead to less restrictive monetary policy.

The Chinese economy grew by a seasonally adjusted 1.6% in Q1 of 2024, quickening from an upwardly revised 1.2% increase in the previous quarter.¹ The Consumer Price Index in China decreased 1% in March over the previous month.² China’s trade surplus declined to USD 58.55 billion in March. Exports shrank by 7.5%, while imports fell by 1.9%.³ The consumer price inflation rate in the Euro Area was confirmed at 2.4% year-on-year in March.⁴ The unemployment rate in the Euro Area stood at a record low of 6.5% in February 2024. Across the major Euro Area economies, Spain continues to report the highest jobless rate at 11.5%, followed by Italy at 7.5% and France at 7.4%.⁵

The U.S. economy expanded an annualized 3.4% in Q4 2023. Government spending rose 4.6%.⁶ Annual inflation in the U.S. accelerated for a second month to 3.5% in March. Energy costs rose 2.1%.⁷ The unemployment rate in the United States dipped to 3.8% in March. The labor force participation rate increased to 62.7%.⁸ The trade deficit in the U.S. widened to $68.9 billion in February 2024, the highest in ten months.⁹ The annual inflation rate in Canada rose to 2.9% in March of 2024. A sharp rise in gasoline prices (4.5% vs 0.8% in February) pushed transportation inflation to 3%. Looking further, a prolonged period of restrictive interest rates by the Bank of Canada, in addition to increasing Treasury yields in the U.S., lifted mortgage interest costs by 25.4% annually. As a result, average rents grew faster (8.5%), keeping rents inflation at 6.5%.¹⁰ The unemployment rate in Canada jumped to 6.1% in March from 5.8% in the earlier month.¹¹

Despite uncertainty surrounding potential Fed rate cuts, economic strength and diminishing recession fears led to the best Q1 U.S. market performance since 2019, with the S&P 500 up 10.6%. The broadening of the rally continued in March, with the S&P Mid Cap 400 up 5.6%, outpacing the S&P 500 3.2% gain. Canadian equities finished the month up 4.1%. The S&P Europe 350 soared 4.1% in March, its best month since November 2023. All but one of 16 countries contributed positively to the pan-European equity returns in March, with the United Kingdom the biggest contributor with 1.0%. Pan Asia equities rebounded but continued to lag the global market, with the S&P Pan Asia BMI rising 2.6% in March.

In April we reversed the asset allocation shift from March, reintroducing exposure to 3-to-7-year treasuries and removing the 20-year plus treasury bond. We no longer anticipate the commencement of rate reductions in the U.S. in June due to current strong economic factors and recent comments made by the Fed. Alternatively, due to an underperforming Canadian economy, we expect the BoC to cut interest rates earlier and more than the Fed this year. U.S. Mid-cap equities continue to provide an industrial-centric sector allocation, ebbing refinancing risk and less demanding valuations relative to mega caps. Gold is held across all models as a long-term strategic asset as it will continue to benefit our portfolio models during stagnation.

The nature of economic cycles is changing. Fiscal policy and electoral cycles will increasingly dominate outlooks. A long list of fiscal commitments, ranging from military to climate-transition expenditure, will keep government budgets in deficit, particularly in Europe. As elections approach, countries will likely loosen fiscal policy further—the U.S. and the U.K. being prime examples in 2024. Our twelve- month forward outlook focuses on the size and scale of the U.S. budget deficit, coupled with the substantial Treasury debt issuance required to address it. We will continue to monitor this as we move through 2024. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ Trading Economics. China GDP. April 16, 2024.

² Trading Economics. China Inflation. April 11, 2024.

³ Trading Economics. China Trade. April 12, 2024.

⁴ Trading Economics. EU GDP. April 17, 2024.

⁵ Trading Economics. EU Unemployment. April 3, 2024.

⁶ Trading Economics. U.S. GDP. March 28, 2024.

⁷ Trading Economics. U.S. Inflation. April 10, 2024.

⁸ Trading Economics. U.S. Unemployment. April 5, 2024.

⁹ Trading Economics. U.S. Trade. April 4, 2024.

¹⁰ Trading Economics. Canada Inflation. April 16, 2024.

¹¹ Trading Economics. Canada Unemployment. April 5, 2024.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2024. Index performance is based on total returns and expressed in the local currency of the index.

The global economy has displayed impressive resilience in the face of aggressive monetary tightening with GDP rising 2.9% over the past four quarters.¹ Domestic output gaps are expected to be far more important in determining inflation in a particular economy than has been seen over the past 20 years of globalization. The result will be shorter and more frequent cycles, accompanied by more volatility and higher inflation, resulting in global growth occurring at a slower rate. In February we maintained our U.S. twelve -month forward looking outlook to reflect our view for Stagnation (U.S. Real GDP growth between 0 and 2.5%), over the entire period. Stagnation will put downward pressure on rates, as moderating inflation will lead to less restrictive monetary policy.

China’s consumer prices fell by 0.8% year over year in January.² The Euro Area economy stagnated in the last quarter of 2023, as persistently high inflation, record borrowing costs, and weak external demand continued to exert downward pressure on growth. Among the bloc’s largest economies, Germany contracted by 0.3%, while France’s GDP stalled. In contrast, economic growth in Spain and Italy accelerated to 0.6% and 0.2%, respectively.³ The Eurozone posted a €16.8 billion trade surplus in December 2023, compared to a deficit of €8.5 billion in the same period last year. Imports tumbled by 18.7%, mainly from Russia, Norway, the U.K., Switzerland, and China. Exports declined by 8.8%, primarily to Russia, Norway, Switzerland, and Japan.⁴

The U.S. economy expanded an annualized 3.2% in Q4 2023. In 2023, the U.S. economy grew 2.5%, compared to 1.9% in 2022.⁵ The unemployment rate in the United States held at 3.7% in January 2024.⁶ U.S. trade deficit narrowed to $773.4 billion in 2023. Imports fell 3.6% due to the lower cost of oil and the slowdown in demand for goods. Exports rose 1.2%.⁷ The Canadian economy expanded by 0.2% in the fourth quarter of 2023, recovering from a revised 0.1% contraction in the previous period, helped by higher exports. The country’s exports of goods and services rebounded by 1.4%, largely due to crude oil and crude bitumen sales. On an annual basis, real GDP grew 1.1%, the third consecutive year of expansion but at the slowest pace since 2016 (2020 excluded), as the economy faced pressure from high-interest rates.⁸ The unemployment rate in Canada eased to 5.7% in January.⁹

Despite a sharp drop on the final trading day of the month, the S&P 500 rose 1.7% in January. Strong Q4 2023 economic growth also dampened optimism that the Fed would be able to begin cutting rates as soon as March. Interest rate volatility led to mixed results among fixed income indices. Canadian equities finished the month on the upside. The S&P/TSX Composite rose 0.6%. The S&P Europe 350 started the year on the front foot, rising by 1.7% in January. 11 out of 16 countries contributed positively to the pan-European equity returns, with the Netherlands the biggest contributor with 0.6%. Pan Asia equities continued to lag the global market with the S&P Pan Asia BMI falling 1.7% in January. The drawdown in Chinese/Hong Kong stocks deepened with the S&P China 500 closing the month at its lowest level since August 2016.

In February we maintained the asset allocation from January. U.S. companies are generally in good shape but will be impacted by refinancing debt at higher rates and capital spending will likely slow. We continue to exclude Canadian exposure as Canada is a worse off on the consumer side, due to shorter-term mortgages compared to the U.S. Gold is held across all models as a long-term strategic asset alongside bonds as they provide returns in a wide range of economic conditions. The diversification and risk reduction advantages of fixed income relative to equities will continue to benefit our portfolio models during stagnation.

The nature of economic cycles is changing. Fiscal policy and electoral cycles will increasingly dominate outlooks. A long list of fiscal commitments, ranging from military to climate-transition expenditure, will keep government budgets in deficit, particularly in Europe. As elections approach, countries will likely loosen fiscal policy further—the U.S. and the U.K. being prime examples in 2024. Our twelve- month forward outlook focusses on the size and scale of the U.S. budget deficit, coupled with the substantial Treasury debt issuance required to address it. We will continue to monitor this as we move through 2024. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ IMF. World Economic Outlook Update. January 2024.

² Trading Economics. China CPI. February 8, 2024.

³ Trading Economics. EU GDP. February 14, 2024.

⁴ Trading Economics. EU Trade. February 15, 2024.

⁵ Trading Economics. U.S. GDP. February 28, 2024.

⁶ Trading Economics. U.S. Unemployment. February 2, 2024.

⁷ Trading Economics. U.S. Trade. February 24, 2024.

⁸ Trading Economics. Canadian GDP. February 29, 2024.

⁹ Trading Economics. Canadian Unemployment. February 24, 2024.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2024. Index performance is based on total returns and expressed in the local currency of the index.

Despite some bumps along the way, the global economy proved resilient in 2023. Alongside an economic deceleration, we expect inflation to cool sufficiently for central banks to begin cutting rates, helping to avert a contraction in the economy. While the Fed’s goal is to pull off a soft landing, the odds are against it. Historically, the Fed has managed a soft landing only twice following nine tightening cycles over the past five decades. The other seven ended in a recession. In December we maintained our U.S. twelve -month forward looking outlook to reflect our view for Stagnation over the entire period.

China’s consumer prices fell by 0.5% in November 2023.¹ China’s trade surplus increased to USD 68.39 billion in November 2023 from USD 66.49 billion in the same period the previous year. The trade surplus with the United States narrowed, with exports falling 5.2% while imports shrank 6.0%.² The Eurozone economy contracted by 0.1% during the third quarter of 2023. Among the bloc’s largest economies, there were contractions in Germany (-0.1%), France (-0.1%), and the Netherlands (-0.2%), while both Spain and Italy expanded by 0.3% and 0.1%, respectively.³ Euro area annual inflation was 2.4% in November 2023, down from 2.9% in October 2023.⁴ The Euro area seasonally-adjusted unemployment rate stood at 6.5% in October 2023, unchanged from the prior month.⁵ 

The U.S. economy expanded an annualized 5.2% in Q3 2023. Exports soared 6% and imports increased 5.2%.⁶ The annual inflation rate in the U.S. slowed to 3.1%. Energy costs dropped 5.4%.⁷ The unemployment rate in the United States fell to 3.7% in November of 2023 from 3.9% in the previous month.⁸ The U.S. trade gap widened slightly to $64.3 billion in October 2023. Total exports went down 1%. Meanwhile, imports edged up a meager 0.2%.⁹ The Canadian GDP contracted by 0.3% in the third quarter of 2023, underscoring that higher interest rates from the Bank of Canada are being transmitted to a greater extent to the Canadian economy, backtracking from robust growth earlier in the year.¹⁰ The annual inflation rate in Canada was at 3.1% in November of 2023. Elevated inflation was attributed to higher mortgage interest costs (29.8%) amid the central bank’s aggressive tightening cycle, although shelter prices as a whole decelerated in October.¹¹ The unemployment rate in Canada rose to 5.8% in November 2023.¹² Canada recorded a trade surplus of CAD 2.97 billion in October 2023, from the downwardly revised CAD 1.12 billion in the previous month.¹³

Optimism returned to the market with a vengeance in November, as cooling inflation readings raised expectations for future Fed rate cuts, boosting U.S. equities, with the S&P 500 up 9.1% in November. The pullback in Treasury yields provided relief for smaller caps, who tend to be more sensitive to borrowing costs, with the S&P Mid Cap 400 and S&P SmallCap 600 up 8.5% and 8.3%, respectively. Canadian equities finished the month on the upside. The S&P/TSX Composite and S&P/TSX 60 rose 7.5% and 7.9%, respectively. The S&P/TSX Composite Diversified Banks was up 8.6%. The S&P Europe 350 soared 6.5% in November and turned positive for Q4. 15 of 16 countries contributed positively to pan-European equity returns this month, with Norway the only exception. Germany and France did the heaviest lifting, contributing 1.2% and 1.1%, respectively, to the S&P Europe 350’s return in November. The S&P Pan Asia BMI rose 7.9%, with every country, factor, and sector contributing positively. Korea led the pack with the S&P Korea BMI posting an 10.7% gain over the month, while China and Hong Kong were among the laggards. Japan’s larger market contributed the most to November’s gains.

In December we maintained the asset allocation from November. We continue to hold gold across all models. Gold is considered a long-term strategic asset alongside bonds as it provides returns in a wide range of economic conditions. In 2023, two significant event risks – the SVB failure and the Israel-Hamas conflict – added between 3% and 6% to gold’s performance.¹⁴ The diversification and risk reduction advantages of fixed income relative to equities will continue to benefit our portfolio models during stagnation. With a soft landing, bond prices may not appreciate much beyond their 2023 year-end range.

Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ Trading Economics. China CPI. December 9, 2023.

² Trading Economics. China Trade. December 7, 2023.

³ Trading Economics. EU GDP. December 7, 2023.

⁴ Trading Economics. EU CPI. December 19, 2023.

⁵ Trading Economics. EU Unemployment. November 30, 2023.

⁶ Trading Economics. U.S. GDP. November 29, 2023.

⁷ Trading Economics. U.S. CPI. December 12, 2023.

⁸ Trading Economics. U.S. Unemployment. December 8, 2023.

⁹ Trading Economics. U.S. Trade. December 6, 2023.

¹⁰ Trading Economics. Canada GDP. November 30, 2023.

¹¹ Trading Economics. Canada CPI. December 19, 2023.

¹² Trading Economics. Canada Unemployment. December 1, 2023.

¹³ Trading Economics. Canada Trade. December 6, 2023.

¹⁴ World Gold Council. Gold Outlook 2024. December 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. November 30, 2023. Index performance is based on total returns and expressed in the local currency of the index.

The U.S. federal government is behind a reindustrialization drive while China’s economy is sputtering and Japan is fueling growth, all while the world taps the brakes on a decades-long era of globalization. This evolution in global trade and economic policy has created a heightened sense of uncertainty over the outlook. Uncertainty about the impact of rising yields is causing central bankers to remain on hold while signaling they remain biased to hike. This bias is likely to be greatest for the Fed where growth remains strong. In October, we maintained our twelve-month forward outlook for the U.S. economy of six months of Stagnation, followed by three months of Recession and then, three months of Stagnation.

The Chinese economy expanded by 4.9% year over year in Q3 2023, as sustained stimulus from Beijing offset the impact of a prolonged property crisis and weak trade.¹ China’s trade surplus in September 2023 narrowed to USD 77.71 billion from USD 82.67 billion in the same period the previous year as both exports and imports declined.² The inflation rate in the Euro Area was confirmed at 4.3% year-on-year in September 2023, down from August’s 5.2%. Energy costs declined further (-4.6% vs -3.3%).³ The Euro area seasonally adjusted unemployment rate fell to 6.4% in August 2023, the lowest on record. The lowest jobless rate was recorded in Germany (3%), while the highest rates were observed in Spain (11.5%), Italy (7.3%), and France (7.3%).⁴

The U.S. trade gap narrowed to $58.3 billion in August 2023. Exports rose 1.6%, led by crude oil. Imports declined 0.7%.⁵ The U.S. inflation rate remained steady at 3.7% in September.⁶ The unemployment rate was at 3.8% in September.⁷ The annual inflation rate in Canada declined to 3.8% in September. The result further strengthened expectations that the Bank of Canada will refrain from further rate hikes in the current cycle.⁸ The unemployment rate remained unchanged for the third consecutive period at 5.5% in August.⁹ 

As the U.S. ten-year Treasury yields rose above 5% for the first time since 2007, the U.S. market rally fizzled, with the S&P 500 down 3.3% in Q3. The S&P Small Cap 600 underperformed, down 4.9%.  Canadian equities finished the month on the downside. The S&P/TSX Composite posted a decline of 3.3%. The S&P Europe 350 ended Q3 slipping 1.5% in September. Just 4 of 16 countries contributed positively with the U.K. the brightest spot, contributing 0.4%, followed by Sweden with 0.1%. Among the detractors, France was the most prominent, subtracting 0.5% from the S&P Europe 350’s return in September. The S&P Pan Asia BMI slipped 2.3% in September and ended the third quarter with a 1.8% loss. 11 of 14 S&P Pan Asia BMI regions ended September in the red, with India contributing 0.2% to the regional benchmark’s return. At the other side of the ledger, Japan was the largest detractor with -0.7%.

In October, we maintained exposure to all asset classes, reflecting the prolonged interest rate tightening cycle and the impact that it is having on the economy. We continue to maintain gold exposure across all models. The expectation of a slowdown is a scenario in which gold has historically performed well. Gold is considered a long-term strategic asset alongside bonds as it provides returns in a wide range of economic conditions.

The forces driving change across the global economy create grounds for the emergence of new and sudden risks to financial markets as fiscal stimulus is reined in, credit provisions contract, and asset prices are constrained by higher real yields. The confluence of these factors should allow the FOMC to begin lowering policy rates in the second half of 2024. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

Drew Millard, Portfolio Manager

¹ Trading Economics. China GDP. October 18, 2023.

² Trading Economics. China Trade. October 13, 2023.

³ Trading Economics. EU Inflation. October 18, 2023.

⁴ Trading Economics. EU Unemployment. October 2, 2023.

⁵ Trading Economics. U.S. Trade. October 5, 2023.

⁶ Trading Economics. U.S. Inflation. October 12, 2023.

⁷ Trading Economics. U.S. Unemployment. October 6, 2023.

⁸ Trading Economics. Canada Inflation. October 17, 2023.

⁹ Trading Economics. Canada Unemployment. October 6, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. September 30, 2023. Index performance is based on total returns and expressed in the local currency of the index.