The year 2023 proved positive for the financial markets, with major indices posting significant gains and showcasing resilience in the face of various challenges. Despite initial concerns over inflation, geopolitical uncertainties, and regional banking crises, the S&P 500 closed out with a gain of over 24%. These impressive results were driven by easing inflation, a resilient economy, and the prospect of lower interest rates, which buoyed investor sentiment, particularly in the last two months of the year. Technology stocks, particularly the Magnificent Seven mega-cap tech stocks, regained their swagger in 2023 and significantly drove market gains. One notable challenge in 2023 was a regional banking crisis that rattled the markets in the spring. The collapse of several banks, triggered by mounting losses on cryptocurrency investments and other factors, initially caused concern and led to a decline in regional bank stock prices. However, the Federal Reserve stepped in, providing emergency loans and assuring customers that their deposits were safe. The crisis ultimately ended with relatively little disruption to equity markets. Inflation and interest rates were major factors influencing the market in 2023. The Federal Reserve’s aggressive rate hikes in 2022 aimed to combat surging inflation, and signs of progress in taming inflation were seen throughout the year. While inflation remained above the Fed’s long-term target, the central bank’s success in bringing it down allowed for a more cautious approach to rate hikes.
The S&P/TSX Total Return Index was up 3.91 percent in December as Canada’s economy stagnated, inflation held at 3.1%, and the Bank of Canada maintained its key rate at 5%.
Canada’s economy remained stagnant in October, with robust retail sales offset by weak manufacturing and a decline in wholesale trade. October’s GDP growth of 0.2% fell below economists’ expectations. Early indicators suggest a modest 0.1% growth in November, driven by improvements in manufacturing and transportation but offset by a decline in retail trade.
Canada’s labor market exceeded expectations by adding 25,000 jobs in November; however, the concurrent rise in the unemployment rate to 5.8%, its highest since January 2022, and a decrease in hours worked underscore the mounting economic challenges. Noteworthy is an 18,000-job decline in the finance, insurance, and real estate sectors during November, signaling a pronounced downturn in these industries over recent months. This trend corresponds with central banks, such as Toronto-Dominion Bank, disclosing plans for significant staff reductions in the upcoming year.
Canada’s November inflation rate unexpectedly held at 3.1%, contrary to the forecasted decrease of 2.9%. The resilient figure, buoyed by rising travel tour prices, prompted a market reassessment. The news strengthened the Canadian dollar by 0.3% to C$1.3351 against the US dollar. Meanwhile, the month-over-month consumer price index saw a 0.1% increase, while core measures, CPI-median and CPI-trim, remained stable at 3.4% and 3.5%, respectively.
In terms of monetary policy, the Bank of Canada (BoC) maintained its overnight policy rate at 5%. This decision stems from recent data indicating a sluggish economic environment, marked by a 1.1% annualized contraction in GDP during Q3 and a rise in unemployment, despite core inflation measures still exceeding the 1%–3% BoC target range. Additionally, the central bank has observed easing demand pressures in the economy as of Q4, suggesting that monetary policy has effectively fulfilled its role. Although wage growth persists in the 4%–5% year-over-year range, the potential softening of the labor market could pose a challenge.
The S&P 500 Total Return index was up 4.54 percent in December as Q3 GDP growth was revised to 4.9%, there was strong job creation in November, and the Fed is considering rate cuts.
The US economy’s third-quarter growth was revised slightly lower to 4.9%, down from the initial estimate of 5.2%. Despite the moderation, this still represents the most robust expansion in nearly two years, reflecting the economy’s resilience during the summer. Increased spending on events and goods contributed to the strength, although the pace has slowed from earlier in the year. The final estimate considered weaker consumer spending, inventory investment, and exports, but hiring and overall spending remains solid. Consumer spending was adjusted to 3.1% for about two-thirds of economic output from 3.6%.
US job creation continued to outpace expectations in November, with nonfarm payrolls growing by 199,000, surpassing the anticipated 190,000 and exceeding the October gain. The increase was attributed to significant government hiring and workers’ return from strikes in the auto and entertainment sectors. Despite a weakening economy, the unemployment rate dropped to 3.7%, lower than the projected 3.9%, while the labor force participation rate rose to 62.8%. A broader unemployment measure, accounting for discouraged workers and those in part-time positions for economic reasons, also decreased to 7%, a 0.2 percentage point decline.
US inflation saw a notable shift in November, with prices falling for the first time since April 2020. The Personal Consumption Expenditures price index dropped 0.1% from the previous month, resulting in an annual inflation rate of 2.6%, an improvement from October’s 2.9%. This decline, driven by a 2.7% drop in energy prices, suggests the possibility of a “soft landing” for the economy as the US Federal Reserve aims to curb inflation through interest rate hikes without triggering a recession.
On monetary policy, the Fed has maintained its benchmark interest rates at 5.25-5.50 percent for the third consecutive meeting, which aligns with expectations. Fed Chairman Jerome Powell indicated a shift towards potential rate cuts as inflation approaches the 2 percent target. The FOMC reduced projections for interest rates next year, suggesting the possibility of three rate cuts in 2024. Powell emphasized the economy’s unpredictable nature and expressed reluctance to rule out further rate increases if necessary.
The MSCI ACWI Ex-US Total Return Index was up 5.05 percent in December as China’s manufacturing decline continued, the Eurozone faced contradictory trends, and the UK economy shrank amid job cuts and inflation deceleration.
China’s manufacturing PMI contracted for the third consecutive month, dropping to 49 in December from November’s 49.4, below the expected 49.5. The prolonged contraction highlights challenges in China’s post-Covid recovery, raising concerns about meeting Beijing’s 2024 economic stabilization goals. The decline is attributed to a complex external environment, suggesting a potential need for additional policy support to boost the economy.
The Eurozone economy experienced some contradictory trends in the latter part of 2023, with GDP contracting 0.1% quarter-on-quarter in Q3 as inventory levels adjusted and sentiment weakened, marking the first decline since late 2022, even as employment rose 0.2% across the euro area and EU. Inflation in the bloc saw welcome relief in November, falling to 2.4% year-on-year as energy prices dropped sharply by 11.5%. However, core inflation, excluding volatile components, remained at 3.6%. Meanwhile, the ECB decided at its December meeting to keep interest rates unchanged following consecutive hikes earlier in the year, suggesting the tightening cycle may conclude as projected slower growth and disinflation take hold over the coming years. While inflation remains above target, recent declines and downward revisions to projections led the ECB to maintain a cautious optimism on the near-term outlook. Policy focus will turn to gradually tapering asset purchases implemented during the pandemic response.
The UK economy unexpectedly shrank by 0.3% in October, defying expectations of no change, with all three key sectors – services, manufacturing, and construction – experiencing declines in output; the unemployment rate remained steady at 4.2%, but job vacancies decreased by 45,000 between September and November, and regular pay growth slowed to 7.3%, compared to the previous month’s 7.7%; inflation decelerated significantly to 3.9% in November, well below the anticipated 4.4%, marking the lowest inflation rate since September 2021, attributed to lower prices in petrol, food, and leisure; despite the positive news on inflation, the Bank of England opted to keep interest rates unchanged at their highest level since the 2008 financial crisis, emphasizing the need to maintain elevated interest rates for an extended period to bring inflation back to the government’s 2% target.
The Portfolio Management Team