It’s been an unsettling start to the new year. We’ve watched the horrific war in Gaza, flare-ups elsewhere in the Middle East, the continuing conflict in Ukraine and sabre-rattling by China and North Korea.
Against this backdrop, the latest U.S. presidential cycle has kicked off with the increasingly likely prospect of a Trump-Biden rematch generating more uncertainty and media noise.
You may be concerned about a Trump return to the White House for many reasons other than the impact on your investment portfolio. For what it’s worth, research from Dimensional Fund Advisors shows there’s no correlation between one or the other party controlling the U.S. administration and the performance of the stock market.
Dimensional notes that the outcome of a U.S. election is only one of many inputs to the market. The same could be said of the many worrisome geopolitical developments around the world.
Still, it wouldn’t be surprising if this information does little to assuage your anxiety about the year ahead. What should help is to constantly remind yourself of one of our core messages here at PWL Capital—we have no way of knowing what’s going to happen this year or any other year.
Unexpected developments—both negative and positive—happen all the time, making a mockery of the predictions of the analysts, pundits and commentators who earn their money convincing people they can see into the future.
You only have to think back to this time last year when we were coming off a difficult year in the markets and many forecasters were predicting rising interest rates would lead to a recession. As PWL Senior Researcher Raymond Kerzérho noted in his 2023 Economic and Financial Commentary the economy proved surprisingly resilient and the markets following suit, capping off the year with a massive rally, despitethe outbreak of war in Gaza.
What we can say about 2024, without indulging in predictions, is that the markets are in a healthier state than they have been for many years. As I noted in November, the rise in interest rates has had a beneficial impact on long-term expected investment returns, especially for bonds.
It’s also a good thing for stocks. When real interest rates were close to zero and inflation was very low, money was essentially free and very plentiful to borrow. That led to more speculation by investors and poor capital allocation decisions by companies.
Now, companies have to compete to attract investment dollars. So do the Canadian and US governments for that matter, which now pay 3.5% to 5.5% to borrow your money. Companies are forced to make better capital allocation decisions and become more efficient. The significant layoffs in big tech last year were just one manifestation of this.
Of course, we are talking about long-term expected returns here and not making a prediction about the stock market’s performance this year. But higher interest rates are an important positive development for investors and that’s one reason to choose optimism and hold fast to your investment plan as we move through this uncertain year.
