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.

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.

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American drill rig count ranged from 1,800 to 2,000 between the years 2011-14, declined to 400 after the oil price crash of 2014-15, grew back to 1,000 pre-COVID, collapsed to 250 during the spring of 2020 and has grown back to about 625 today — well below pre-COVID and just 30 per cent of peak levels. Shale oil break-even ranges from $30 to $90, with an average in the low $50s. Shale oil has a rapid decline rate with production from drilled wells typically declining 75-90 per cent in the first three years, making continual drilling a must for sustained production.

U.S. oil production peaked at 13 million BPD pre-COVID and declined to 10 million BPD through COVID, a larger percentage than OPEC+ cut. It has since recovered to 11.5 million BPD. A massive oil glut 18 months ago has now disappeared with current inventories below normal levels, meaning consumption has exceeded production since then. Unprecedented economic disruptions in 2020 caused only a nine per cent oil demand reduction, which has now fully rebounded.

Approximately 30 per cent of oil and gas comes from our oceans and almost all of the publicly traded ocean drilling companies have declared bankruptcy over the past five years, signifying the dearth in ocean activity. While onshore shale can ramp up quickly with the correct price signal, ocean activities require much longer lead times.

Table 1 shows the current (2019) total world energy consumption makeup. Since 1990, total energy consumption has grown 63.2 per cent, or about two per cent per year, with all sources except traditional biomass showing significant growth. Energy consumption growth is highly correlated with economic growth. The only three periods of decline in recent history were the 1980-82, 2008-09 and 2020 severe recessions. If world GDP growth continues, the desired outcome — unless we desire high unemployment — total energy consumption will also grow. Adoption of more efficient systems may slow consumption growth, but GDP and total energy consumption will remain correlated.

Since the 2007-08 energy price spike, there has been massive investment in wind and solar, yet nowhere near enough to meet energy demand growth, let alone replace fossil fuels. Society appears to be only looking at the negatives of fossil fuels and the positives of wind and solar, but as all of the alternatives become more prevalent, the negatives associated with them will also become more evident.

As an example, while nuclear is a carbon-free and safe energy source, Germany is mothballing its entire fleet, with the last two coming off-line this year. This led to energy supply shortages and emissions growth from electrical production in the magnitude of 20-25 per cent this past summer as coal usage soared. The price of thermal coal tripled. While I support all efforts towards efficiency and the search for viable alternatives, there are simply no readily available substitutes for world energy needs.

The last eight years have been dominated by energy surpluses, and it looks like the next decade could be dominated by shortages as we begin to feel the effects of underinvestment and the political climate. I fail to understand why western democracies insist on shutting down our own energy production systems for the benefit of Russia and OPEC. Shamefully, Canada missed an LNG (liquefied natural gas) opportunity to replace some world coal usage. Shortages could easily lead to price spikes as occurred in Europe and China recently.

This represents an investment opportunity. Energy stocks have rallied significantly but are still cheap relative to the price of oil. Many are trading with 10-25 per cent free cash flow yields. The Canadian energy exchange-traded fund XEG still trades below where it was from 2005 to 2015. I periodically add energy to my portfolios and have no ethical qualms buying shares in companies supplying basic needs in the most efficient manner possible.

Many oil and gas stocks look attractive. Oilsands producers with more than 30 years of supply and improving means of egress, particularly so. I also like ocean-focused companies, which remain depressed. Energy is volatile and portfolio balance is important. If you’re looking to add, the following ticker symbols are in our personal portfolios — SU, IMO, CVE and CNQ in Canada and SLB, OII, RIG and FTI in the United States.

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The farmers parked tractors on a national highway near the town of Larissa in central Greece, where they faced off with police.

Kostas Tzelas, head of the Karditsa agricultural association, said the rising prices for fuel and electricity had increased production costs by 50 per cent.

“They don’t solve the basic problems that we have to maintain our farms and villages,” Tzelas said. “We ask for substantial measures that will give a real solution to our problems.”

Greece has spent about 1.7 billion euros (C$2.48 billion) subsidizing power bills for farmers, households and businesses to help them with rising energy prices.

High energy costs have been the main driver of inflation, which accelerated to 5.1 per cent in December, the highest in the country in 11 years.

Tzelas, speaking at the rally outside Larissa, the largest city of Greece’s central agricultural heartland, said: “That is why we are out on the streets, the countryside will become deserted, villages will be deserted, people will not be able to cultivate and we will no longer be able to live in our villages.”

Earlier on Friday, the government unveiled an additional 170 million euros in financial aid for the agriculture sector.

Agriculture Minister Spilios Livanos said in a televised statement that despite its tight finances, Greece had offered one billion euros in aid to farmers last year.

“At this difficult point of multiple major outside crises, we’re standing by our producers,” he said.

The package includes subsidies to cover 80 per cent of the additional costs farmers face on their power bills from August up to December and half of this cost for January and February.

A sales tax on fertilizers will be cut by 46 per cent to 13 per cent.

Farmers, who said the latest measures are not enough, have staged several protests in the past over social security laws and pension contributions.

The farm sector accounts for a small part of Greece’s output, but it employs hundreds of thousands of people, most of them seasonal workers.

— Reporting for Reuters by Alexandros Avramidis; writing by Angeliki Koutantou.

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