December 2023
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.
