The world didn’t end in 2023.
One year ago, you might have thought it was on the brink by the deafening chorus of market pundits predicting a dystopian future of oppressively high interest rates, runaway inflation and stock market collapse.
As it turns out, a massive and co-ordinated interest rate hike by the world’s major central banks (including the Bank of Canada) in under two years has succeeded in bringing inflation closer to their two per cent target rate.
As borrowing rates rose alongside a five-per-cent increase in the benchmark rate, the S&P 500 advanced by 23 per cent, and even the troubled TSX Composite stumbled to a seven-per-cent gain for the year.
Heading into 2024, mortgage rates topping seven per cent have helped cool the over-heated housing market and finally put buyers in the driver’s seat with strong signals rates will trend down.
For retirement investors who heeded the bear call and stayed on the sidelines, 2023 was a lost opportunity. As a benchmark for a diversified portfolio: $100,000 in a basic market-weighted exchange traded fund (ETF) that tracks the S&P 500 would have become $123,000 to compound over time.
STARS LINE UP FOR 2024
Of course, no one knows what the new year will bring.
Rates could be increased further if inflation gets out of control, but central banks have agreed to pause for now. If a market-jolting disaster strikes, central banks will at least have the ability to lower rates to keep capital flowing.
For investors, expectations remain high for 2024. The Chicago Board Options Exchange Volatility Index, known as the VIX or fear gauge, has fallen to pre-pandemic levels. It’s down 37 per cent since the start of 2023.
Corporate earnings, the primary driver of stock markets over the medium to long term, are poised for big gains. Earnings trackers at the London Stock Exchange Group (LSEG) expect the companies that make up the S&P 500 will report 12.5 per cent earnings growth over 2023, well above the trailing 10-year average annual rate of 8.4 per cent.
LSEG expects year-over-year earnings for the TSX Composite Index to increase by 21.3 per cent in the first quarter and 13 per cent in the second quarter. TSX-listed stalwarts include the big Canadian banks, telecom and energy companies, which all posted lackluster performances in 2023.
If the stock market roller-coaster is too much stress, guaranteed investment certificates (GICs) are yielding above five per cent annual. In addition to generating decent returns, a fixed-income portfolio with staggered maturities can be a risk cushion within the broader portfolio.
LESSON FOR 2024: BEWARE OF THE PERMA-BEAR
Major global equity markets have consistently gone up in value over time since before the Second World War, and most major market researchers say that is likely to continue into 2024.
On the way up, stock markets often go down, and that’s when skeptics are essential for identifying the downs before they happen and limiting investment losses. Named for their bear-like tendency to attack from a higher position, bears add efficiency and stability to the broader markets.
The best bears are converts from bulls because they know both sides of a trade, but in many cases their pessimism is self-serving. The term “talking your book” suggests the primary motive for any market view is to support a position. These are the perma-bears and they could be getting in your ear.
There are endless ways to profit from market volatility, often through hedge funds that short equities when they fall or hold alternative investments for wealthy clients looking to manage risk.
Many perma-bears expect alternative investments, such as gold or cryptocurrencies, to move inversely with equity markets or thrive in market turmoil.
They range from multi-billion dollar portfolio managers to speculators spooking mom and pop into selling low.
Segregated funds have become a perma-bear industry in themselves for insurance companies by adding costly insurance wrappers that protect against losses in mutual funds.
Frightening investors into making frequent and impulsive trades is also good business for trading platforms that charge commission by the trade.