It’s difficult to make predictions, especially about the future.”
One of my favorite prediction quotes comes by way of the legendary baseball player, manager and philosopher, Yogi Berra. This quote, like many of his famous quips, incorporates a meaningful paradox.
Following up on my previous column, the TSX ended 2023 with a total return — price appreciation plus dividends — of 11.8 per cent, while the S&P 500 finished with outstanding returns of 26.3 per cent, hugely different than the two per cent decline predicted.
The bulk of S&P gains came from a handful of large tech companies, while Shopify alone represented one-quarter of TSX gains. Only in the last two months of the year did the rest of the market catch a spark.
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Never has the S&P 500 been so skewed to such a small number of companies. The top 10 companies, just two per cent of the total companies in the index, now represent an outsized 32 per cent of the entire index. The five largest companies have the same market cap as the U.K., China, France and Japan combined. Dividend-paying value companies were out of favour until late in the year.
My fearless predictions for 2023 were easy to make after repeatedly reading negative commentary, leading to my optimism. This year’s predictions are more difficult, given the wide variations in what the pros are saying. S&P 500 predictions I’ve read have varied as much as down 15 to up 25 per cent. Whereas last year’s predictions were clustered together and negative, this year’s are all over the map. A year ago, a recession was a foregone conclusion. Now, even though we’re 12 months further into the interest rate-tightening cycle, many are retracting recession predictions and it’s a 50-50 mix as to whether the U.S. will experience recession. Market forecasters are predicting a 1.3 per cent Fed funds rate decline.
With this backdrop, the following is how I see 2024 playing out.
Fearless prediction 1: Most predictions will be wrong.
Again!
Fearless prediction 2: A recession in Canada, but not the U.S.
I went back 100 years to look at when recessions started relative to the U.S. election cycle. In 24 previous cycles, recessions started in an election year only four times, with two being anomalies. The COVID recession came when the economy was strong, and a 1948 recession started coincident but not before the election. Incumbent governments will do what they can to stay in power, priming the economic pump with fiscal stimulus if necessary. Not surprisingly, seven recessions started the year after an election year, although that trend was more evident pre-1980. Economic growth is currently strong and U.S. consumers remain in good shape and are not as immediately impacted by rising interest rates, with 30-year mortgages the norm. Additionally, U.S. manufacturing construction spending has more than doubled over the past two years as re-shoring takes place.
The Canadian economy, on the other hand, is weak, especially considering a record of 430,000 new immigrants in the third quarter alone. Per capita GDP (gross domestic product) fell by 4.4 per cent. While an overall economic recession is uncertain, there is no question Canadian families are in recession. More mortgages will be renewed at higher rates in 2024, adding further financial stress. While corporate debt levels are reasonable, personal and government debt levels are high to out of control.
Normally our two economies go into recession together, making my forecast an unusual situation. Given the importance of our trading relationship, if the U.S. avoids recession, ours will probably be shallow.
Fearless prediction 3: Interest rates will not drop as much as expected.
If the U.S. avoids recession, the Fed funds rate may not drop as expected. While considered “elevated” by many, current rates are more the norm than the ultra-low rates of the last decade. A Canadian recession without a U.S recession will be a challenge for the Bank of Canada. Our already-weak currency will handcuff its ability to respond to recession with unilateral rate cuts.
Fearless prediction 4: I remain bullish on energy.
There is currently a lot of bearish sentiment in oil. World inventories remain low while U.S. inventories are growing modestly. The U.S. government will continue to work levers to keep prices down, to improve the odds of re-election. Another warm winter is adding to the bearish sentiment, as are the ever-present recession fears. Energy stocks appear to be good value even if oil stays around $70, which I think will be the low end of where it trades over the next year, but big price appreciation has been pushed into the future.
Fearless prediction 5: Markets will experience modest gains.
Last year I was very bullish, given the dour sentiment, but current investor sentiment is robust. I find sentiment a good contraindicator. Today’s near-record market levels are on much firmer ground than two years ago when meme stocks and SPACs (special purpose acquisition companies) were all the rage. While most of the big 10 companies have high valuations, they are not speculative stocks. Participation in the year-end rally by non-tech stocks is encouraging. I think the big tech companies may rest for a while, and other companies will take the lead. I predict the S&P 500 will end the year up five to 10 per cent, with the TSX up maybe eight to 12. The U.S election promises to be interesting and tumultuous, causing market volatility.
Please always keep in mind the first prediction — and I rarely make decisions around predictions because of this.
As this is the first article written in the new year, an update of the titanium-strength portfolio is in order. We experienced modest gains of 7.5 per cent in 2023, given its conservative, dividend focus. As shown in the table here, it is now up 57.3 per cent in 5.5 years. I will use the Canadian dividends to add an additional 40 shares of Fortis at the year-end closing price of $54.51.
