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.