Global economies, overall, have performed better than expected in 2023 in the face of high levels of debt, less than accommodative monetary policy, a growing number of geopolitical tensions, and an unstable Chinese economy present challenge. Central bank hiking and cutting cycles continue around the globe and we expect that the historical pattern of rates rising into a recession, falling just prior, and continuing to fall into the first four to five months of recessions is likely to continue in many economies.  In the United States, a gap has emerged between real GDP (Gross Domestic Product) growth, signaling a “soft landing”, and real GDI (Gross Domestic Income) growth, providing support to the view that a recession is pending. In November we revised our U.S. twelve -month forward looking outlook to reflect our view for Stagnation over the entire period.

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 surveyed urban unemployment rate was 5% in October 2023, the same as in the previous month.2 China’s trade surplus in October 2023 narrowed sharply to USD 56.53 billion from USD 82.35 billion in the same period the previous year.3 The Gross Domestic Product (GDP) in European Union stagnated at 0% in the third quarter of 2023 over the previous quarter. Among the bloc’s biggest economies, the GDP shrank in Germany (-0.1%), stalled in Italy, and rose modestly in France (0.1%) and Spain (0.3%).4 The inflation rate in the Euro Area was confirmed at 2.9% year-on-year in October primarily driven by a decline in energy prices and a slowdown in food inflation.5 The Euro Area seasonally-adjusted unemployment rate increased to 6.5% in September. Amongst the largest Euro Area economies, the lowest jobless rate was recorded in Germany (3%), while the highest rates were observed in Spain (12%), Italy (7.4%) and France (7.3%).6

The U.S. economy expanded an annualized 4.9% in the third quarter of 2023.7 The annual inflation rate slowed to 3.2% from 3.7% in September.8 The unemployment rate for full-time workers was 3.70%.9 The annual inflation rate in Canada fell to 3.1% in October. Lower energy costs and slowing grocery price growth were the main contributors. Inflation is impacting a smaller share of products in the consumer basket. Most of the drop in Canadian headline CPI growth came from a 4.5% month over month decline in gasoline prices.10 The unemployment rate in Canada rose to 5.7% in October.11 Canada posted a trade surplus of CAD 2 billion in September of 2023, widening considerably from the upwardly revised CAD 0.95 billion surplus in the previous month. Higher crude oil prices during the period lifted energy exports by 10.6%, representing over one-third of Canadian foreign sales.12

Mixed earnings results, surging Treasury yields, geopolitical tensions, and uncertainty surrounding the Fed’s future rate trajectory spooked U.S. equities, with the S&P 500 down 2.1% in October. Continued concerns around an impending recession were detrimental to the more domestically oriented S&P Mid-Cap 400 and S&P SmallCap 600, down 5.3% and 5.7% respectively. Canadian equities finished the month on the downside. The S&P/TSX Composite fell 3.2%. The S&P Europe 350 slipped 3.6% in October. Three of 16 countries contributed positively to pan European equity returns with Denmark contributing +0.03%. Among the detractors, the U.K. subtracted 1.0% from the S&P Europe 350’s return in October. The S&P Pan Asia BMI plunged 4.3% in October. Japan was responsible for over a third of the S&P Pan Asia BMI’s monthly loss.

In November we eliminated exposure to the Canadian equity market and reduced exposure to U.S. Municipal Bonds and Cash. The allocations from these reductions were added to U.S. Mid-Caps. We continue to maintain gold exposure 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.

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 Unemployment. November 15, 2023.

3 Trading Economics. China Trade. November 7, 2023.

4 Trading Economics. EU GDP. November 14, 2023.

5 Trading Economics. EU Inflation. November 17, 2023.

6 Trading Economics. EU Unemployment. November 3, 2023.

7 Trading Economics. US GDP. October 26, 2023.

8 Trading Economics. US Inflation. November 14, 2023.

9 Trading Economics. US Unemployment. November 16, 2023.

10 Trading Economics. Canada Inflation. November 21, 2023.

11 Trading Economics. Canada Unemployment. November 3, 2023.

12 Trading Economics. Canada Trade. November 7, 2023.

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