2024 was a stellar year for investors. We’ve all enjoyed watching stock markets rise significantly, particularly so in the United States but also around the world. These strong returns came in the context of a surprisingly resilient U.S. economy and reductions in central bank interest rates. They also occurred despite a rise in unemployment in North America, which was significant and rapid enough to trigger the vaunted Sahm rule, portending a recession which hasn’t come. As I wrote recently, many headlines at the end of 2023 were warning of a significant stock market drop to come in 2024, which in hindsight never materialized. As always, we’ll be publishing Raymond Kerzérho’s economic and market update in our next newsletter, in which you’ll see the returns for the various markets in which your portfolio is invested.
Bond market returns were very decent in Canada, as the Bank of Canada reduced its policy interest rate, short term bonds benefitted from falling interest rates and longer-term bonds only saw a modest increase in their yields, such that the returns to bonds were reasonable across the maturity spectrum. However, it was a different story for the U.S. bond market. While short term interest rates also declined along with the Federal Reserve’s overnight rate, longer term interest rates rose at the end of the year on fears of inflationary fiscal policies foreshadowed by the President-elect.
Speaking of politics, both sides of the border seem to defy all reasonable expectations and set the stage for a challenging year ahead. On the Canadian side, we have a lame duck government that is ill positioned to fight off the challenge coming from Trump’s rhetoric. Trump’s political playbook is not new: he picks on an ‘enemy’ for which his electorate won’t take the time or trouble to dig below the surface of his wild allegations. He targeted immigrants this way in his election campaigns, and now he’s doing the same to Canada. Whether Trump follows through on his threats remains to be seen, but there is no doubt that he is a master of sensationalism.
Trudeau has also left Canadians in limbo with respect to many recent announcements, such as the new capital gains tax rate and the extension to the charitable donation deadline for 2024. With our parliament prorogued, Canadians are left to wonder whether these measures will ultimately receive royal assent or if they’ll be dropped by the current or a future government. Meanwhile, the Canada Revenue Agency must act as though they are in effect until the government announces otherwise.
All of the above is enough to frazzle the most stoic nerves and investors are rightly concerned about what to expect for the year to come. With the U.S. market seemingly at historic highs, it’s so tempting to give into the urge to try and time the market by getting out, in expectation of the ‘inevitable’ crash to come. At times like this, it’s so important to remember some of the fundamentals that make a properly designed investment plan work:
Most importantly, the allocation to bonds in your portfolio has been chosen to ensure that your spending needs can and will be met over the coming years, regardless of what stock markets do. If you have any concerns that this might not be the case, don’t hesitate to reach out to discuss.
If the desire to flee stock markets takes hold, just remember that it takes two correct timing decisions to win that game: You have to time your exit at the top, and you have to buy back at the bottom too. In my 20-year career, I’ve seen the odd client or manager get the first or the second call right, but I’ve never seen anyone make both calls correctly.
With that, the best approach to the New Year is to be grateful for what we’ve had (portfolio returns between 9% and 21% net of fees) and to focus on what we can control: a well-developed investment plan that takes your spending needs into account. Let markets do whatever they’re going to do. We’ve planned for it together.
Source : PWL Capital
