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.