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March 2024

As anticipated, the FOMC voted in March to leave the target range for the federal funds rate unchanged at 5.25% to 5.50%. This was the fifth consecutive stand pat decision, all of which have been unanimous. Broadening global economic activity should help broaden investment performance, which has been narrowly concentrated in U.S. mega-cap equities. Bull markets have begun to take hold in a diverse collection of global markets including Japan, Brazil, Italy, Denmark, and India. In March 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 rose by 0.7% year over year in February,1 while China’s surveyed urban unemployment rate averaged 5.3%.2 China’s trade surplus increased in February as exports grew by 7.1%, while imports climbed by 3.5%. The trade surplus with the United States saw exports rising 5% while imports declined by 9.7%.3 Annual core inflation in the Euro Area fell for a seventh straight month to 3.1% in February 2024.4 The Eurozone posted a trade surplus of €11.4 billion in January 2024, compared with a deficit of €32.6 billion in the same period last year. Exports rose 1.3% year-on-year. Among key trading partners, exports increased mainly to the U.S., Japan, and Switzerland, but dropped to Russia, China, and Norway. Meanwhile, imports slipped by 16.1%, primarily from China, the U.S., Switzerland, Norway, Russia, Japan, and India.5

The U.S. economy expanded an annualized 3.4% in Q4 2023, supported by consumer spending and non-residential business investments, according to the third estimate from the BEA.6 The annual core consumer price inflation rate in the United States eased to a near three-year low of 3.8% in February.7  The unemployment rate in the United States rose by 0.2 percentage points to 3.9% in February.8 U.S. imports rose by 1.1% while exports increased at a much slower rate of 0.2%.9 The Canadian economy expanded by 0.2% in the fourth quarter of 2023, recovering from a revised 0.1% contraction in the previous period. The country’s exports of goods and services rebounded by 1.4%, largely due to crude oil and crude bitumen sales (+6.2%). Meanwhile, imports of goods and services declined by 0.4%.10 The annual inflation rate in Canada slowed further to 2.8% in February,11 while the unemployment rate in Canada rose to 5.8%.12

Markets shook off looming concerns over inflation and the Fed’s future rate trajectory with more record highs in February, driving the S&P 500 up 5.3%. While Small Caps lagged, the S&P Midcap 400 was up 5.9%. Canadian equities finished the month on the upside. The S&P/TSX Composite rose 1.8%. The S&P Europe 350 extended its January gains in February, up 2.0% during the month. 8 of 16 countries contributed positively to the pan-European equity returns, with Germany the biggest contributor with 0.6%. Pan Asia equities rebounded but continued to lag the global market, with the S&P Pan Asia BMI rising 3.6% in February. China led the pack with the S&P China 500 bouncing back from its multi-year lows and closing the month up 9.3%.

In March we shifted the asset allocation, reducing exposure to 3-to-7-year treasuries and adding the 20-year plus treasury bond in anticipation of the commencement of rate reductions in the U.S. 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 alongside bonds as they 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 Trading Economics. China Inflation. March 9, 2024.

2 Trading Economics. China Unemployment. March 18, 2024.

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

4 Trading Economics. EU Inflation. March 18, 2024.

5 Trading Economics. EU Trade. March 18, 2024.

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

7 Trading Economics. U.S. Inflation. March 12, 2024.

8 Trading Economics. U.S. Unemployment. March 8, 2024.

9 Trading Economics. U.S. Trade. March 28, 2024.

10 Trading Economics. Canada GDP. February 29, 2024.

11 Trading Economics. Canada Inflation. March 19, 2024.

12 Trading Economics. Canada Unemployment. March 8, 2024.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 29, 2024. Index performance is based on total returns and expressed in the local currency of the index.

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February 2024

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.

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January 2024

Global fourth-quarter data has provided evidence that the recovery remains on solid footing, pointing to continued, but slower growth in the first three months of 2024. In the U.S., layoffs remain low, and job growth has held steady. Cooling inflation has meant that wages are now rising faster than prices. In January we maintained our U.S. twelve -month forward looking outlook to reflect our view for Stagnation over the entire period. Stagnation will put downward pressure on rates, as moderating inflation will lead to less restrictive monetary policy.

China’s economy grew 5.2% in 2023. China’s consumer prices fell by 0.3% in December.1 China’s surveyed urban unemployment rate inched up to 5.1% in December.2 The inflation rate in the Euro Area was confirmed at 2.9% in December.3 The Euro Area posted a trade surplus of EUR 20.3 billion in November 2023. Imports tumbled by 16.7%, while exports fell at softer 4.7%.4

The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled, and a widely predicted recession never materialized.  Gross domestic product, adjusted for inflation, grew at a 3.3% annual rate in the fourth quarter, down from the 4.9% rate in the third quarter.5 The annual inflation rate in the U.S. went up to 3.4% in December from a five-month low of 3.1% in November.6 The unemployment rate in the United States held at 3.7% in December, influenced by a slowdown in new entries into the labor force.7 The U.S. trade gap narrowed to $63.2 billion in November. Total exports were down 1.9%, prompted by a fall in sales of nonmonetary gold and crude oil. Total imports fell 1.9%. The deficit decreased with China and the European Union but increased with Switzerland.8 The annual inflation rate in Canada rose to 3.4% in December.9 The unemployment rate in Canada was at 5.8% in December.10 Canada recorded a trade surplus of CAD 1.6 billion in November of 2023. Foreign purchases rose for 8 of 11 product sections, led by an increase in energy imports (11.6%) amid significant buying of uranium for Kazakhstan, consistent with mining troubles from domestic mines.11

After a dismal 2022, the market recovered with a vengeance in 2023. The S&P 500 finished with a 26.3% return for the year. The strength of the Magnificent Seven powered those gains throughout, pushing the mega-cap S&P 500 Top 50 up 38%. The S&P Mid Cap 400 and S&P Small Cap 600 rose 16.4% and 16.1%. Strong gains in gold helped Precious Metals rise 11.5%, but Agriculture, Industrial Metals, and Energy posted losses. Canadian equities finished the month on the upside with the S&P/TSX Composite rising 3.9%. The S&P Europe 350 soared 3.7% in the final month to finish 2023 with a 16.8% total return. Fifteen of sixteen countries contributed positively to pan-European equity returns this year. The heavyweight French market was the brightest spot, contributing +3.3%. Germany and the United Kingdom also made major contributions of 2.5% and 2.3%, respectively. Finland was the only country that slipped in 2023, subtracting 0.05% from the S&P Europe 350’s annual return. The S&P Pan Asia BMI rose 4.7% in December after an 8% rally in November, closing the year with a total return of 12.8%.

In January we maintained the asset allocation from December. 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. The diversification and risk reduction advantages of fixed income relative to equities will continue to benefit our portfolio models during stagnation, with longer duration bonds eventually being added back into the mix.

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. The outlook for deficits will be a driver of rate-market volatility in 2024, especially around quarterly refunding announcements and longer-dated Treasury auctions. In addition, the U.S. presidential election outcome could precipitate a material rise in yields and volatility. A Republican control of Congress would dampen any move toward entitlement reform, raise market expectations that the 2017 tax cuts would be extended, and increase the odds that corporate tax increases in the Inflation Reduction Act would be eliminated. Progress on fiscal reform would be kicked down the road. We will continue to monitor these 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. January 12, 2024.

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

3 Trading Economics. EU Inflation. January 17, 2024.

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

5 Trading Economics. U.S. GDP. January 25, 2024.

6 Trading Economics. U.S. Inflation. January 11, 2024.

7 Trading Economics. U.S. Unemployment. January 5, 2024.

8 Trading Economics. U.S. Trade. January 9, 2024.

9 Trading Economics. Canada Inflation. January 16, 2024.

10 Trading Economics. Canada Unemployment. January 5, 2024.

11 Trading Economics. Canada Trade. January 9, 2024.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2023. Index performance is based on total returns and expressed in the local currency of the index.

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