Perspectives: Quarterly economic and market outlook

The final two months of last year witnessed an “everything rally”, with strong returns in virtually all asset classes. The catalyst, of course, was the U.S. Federal Reserve’s (the Fed) unexpectedly early pivot away from policy tightening and towards the start of an easing cycle. Underlying this pivot was a quicker decline in U.S. consumer price inflation than widely expected. This decline also occurred with far less evidence of economic pain than was anticipated, or is usual in these episodes — full-on Goldilocks. The disinflation process hasn’t been quite so benign elsewhere. Recent activity data in Canada and Europe have been more consistent with the mild recession we expected for both economies.

As we look forward, many of the same trends will likely persist into this year. The U.S. economy appears resilient, with looser financial conditions, robust growth in real incomes and positive wealth effects all supportive of consumer spending. Growth is likely to fall below its strong pace of last year, but won’t dip too far under its long-term trend. And with more disinflation to come, the Fed will likely be cutting rates. The question in our minds is, how much and how soon? This is where we differ a little from the bullish market consensus; we expect the Fed to start rate cuts a little later than the consensus and to cut a little less. It’s a similar outlook for central banks in Canada and Europe given a continued strong increase in labour costs.

A mix of resilient growth in the U.S. and policy easing across much of the global economy makes us cautiously optimistic for equity markets. Volatility is expected to be higher this year than in 2023 as markets grapple with the regular flow of economic data and messaging from central banks. Unlike much of last year, when central banks and heightened recession risk presented a sustained challenge to equity investors, volatility this year suggests opportunities to deploy risk at better levels. Investors will likely be rewarded for selectivity and we continue to emphasize a focus on strong fundamentals and relatively attractive valuations. Canada and several emerging markets, excluding China, are noteworthy in this regard.

And while the strong rally in yields at the end of last year moved bonds out from the depths of the bargain bin, they remain attractive relative to recent history. As with equities, selectivity will be key, particularly early in the year as markets reprice central banks into line with our view. Fixed income is expected to offer attractive opportunities to investors as we move through 2024.

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