John Zechner, chairman and founder, J. Zechner Associates

MARKET OUTLOOK:

Stocks have surged since the end of October and are on pace for the strongest finish to any year since the 1990s. 

One bit of worry for the stock market is the sentiment indicators, which are almost frightening in terms of how frothy things have become as shown in the December Bank of America Global Fund Manager Survey. "Don’t fight the Fed" has always been a mantra for investors, so the pivot towards a more dovish outlook on interest rates should not be underestimated, particularly in this seasonally strong period for stocks. The bottom line is that this liquidity argument may take stocks higher in the short term. The economic and corporate earnings recoveries to justify those moves could come up well short of expectations next year. Also, valuations are near record levels, expectations for earnings growth in 2024 seem far too optimistic, sentiment is at extreme bullish levels and our outlook is for a sharp deceleration in economic activity over the next few quarters. 

We have the most confidence in the idea that interest rates will finish 2024 lower than where they started. That alone is enough to keep us with at least a "market weight" in bonds. Given that the 10-year in the U.S. has already rallied from almost five per cent to less than four per cent, we are reticent to go overweight on bonds but would look to do that on any move in yields back above 4.3 per cent. Our bond weight in balanced portfolios is around 37 per cent, with another six per cent in preferred shares. Regarding stocks, we have used the strength into year-end to go slightly underweight and expect to maintain that position. 

Our stock weight in balanced funds is around 45 per cent, which is at the lower quartile of our typical 40 to 60-per-cent range. While we are more bearish than consensus on the outlook for the economy and corporate earnings, we understand that the flow of liquidity into stocks could continue into the early months of 2024. The biggest areas of earnings risk are in the cyclical sectors such as industrials, consumer goods, financials and basic materials. 

Technology and consumer staples sectors usually do well in periods of falling interest rates. However, the valuations of those sectors are already at the high end of their traditional range, so we don’t see much upside from the big names but do see more opportunities in some of the mid-sized names. Precious metals should finally get a lift in 2024 as valuations are at multi-decade lows, corporate activity should pick up and weaker economic growth in the U.S. should undermine the U.S. dollar and give a further lift to gold prices. 

In terms of the energy sector, we recognize that weaker global growth will cause a fall in global demand for energy and may also make it more difficult for the OPEC+ group to maintain their production discipline. However, valuations in the Canadian producer sector are attractive even with oil in the US$70 range. Our focus in the sector is on mid-sized oil-levered producers, with double-digit free cash flow yields and "investor friendly" activity such as debt reduction, special dividends and share buybacks.

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TOP PICK:

Pembina Pipeline (PPL TSX)

Brianne Gardner, senior wealth manager, Velocity Investment Partners, Raymond James

MARKET OUTLOOK:

The market is pricing in almost a 70 per cent probability that rates will decrease by the first quarter of next year. We expect interest rates to start their way down somewhere between the end of the first and second quarter, as consumption stabilizes, and economic activity starts to ease.

We don’t expect a crash landing but rather a “bumpy” landing and a more volatile year ahead, which makes it favourable for active managers and stock picking becomes more crucial over buy and hold.

For 2024, we are expecting a soft landing, we are expecting macro data to ease starting in the first quarter of the year when consumption stabilizes. We expect a quick recovery of the market after that, as corporate earnings continue to be resilient. Also following looking at some seasonal patterns, this has been a third strong year in the presidential cycle, and we expect a fourth year of positive returns, not as strong as this year but in continuous growth.

Our two concerns are whether progress on inflation will stall and whether the U.S. Federal Reserve’s two per cent target will prove reasonable.

We expect the market’s narrow focus on tech mega-caps in 2023 to broaden in 2024 and see opportunity within many areas “left behind” this year.

After we see seven weeks of markets performance on the uptrend/positive, on average the next six-month forward return is four per cent and positive 67 per cent of the time and one year forward return is +10 per cent and positive 83 per cent of the time

We are watching the cash on the sidelines closely a there is still roughly $6 trillion in cash that could come flowing into the markets. The S&P ETF SPY saw its biggest inflow ever last Friday with a single day of almost $21 billion.

Also, consumer spending is slowing with over $1 trillion in debt and interest rates are extremely high will impact investors and debt versus gross domestic product (GDP) and spending which drives the economy. Ten per cent of mortgages renew in 2024 in Canada and 50 per cent in 2025!

When we see the economy in a full recession, we actually see the start of a new bull market in the stock market. That is because the economy and the stock market are separate and the stock market is forward looking. Also, we don’t know we are in a recession until we are already in one!

The presidential election cycle is also a favourable setup for stocks – as historically we do see presidents come in and over promise and the markets have a strong year in the fourth year of an election period. Returns historically were positive 83 per cent of the time during presidential election years

TOP PICK:

Capital Power (CPX TSX)

Earl Davis, Head of Fixed Income and Money Markets, BMO Global Asset Management

• Less macro, more bottom up
• All about yield return and credit pickup
• Credit picking becomes more important towards the end of a business cycle
• More comfortable extending duration to the five to 10-year sector

Range Bound Rates

• five to 30-year yields within the broad 2023 range
• five-year bonds: 2.77% - 4.41 (presently at 3.17)
• 10-year bonds: 2.72% – 4.24 (presently at 3.05)
• 30-year bonds: 2.80%  – 4.00 (presently at 2.90)

Macro

• Fed 4.75 per cent: BoC 4.25 per cent
• Soft landing is the base case

First Half 2024– looking for answers to the following questions:

• When will the easing cycle start and how low will it go?
• Where does inflation trough?
• Do we get a recession and what type of severity?

Second Half of 2024

• Foresee an acceleration of eases
• Curve steepening

TOP PICK:

Rogers Corporate Bonds