Our 2024 Wish List

Alfred Lam - Jan 23, 2024

Is the great inflation battle really over? Investors' wishes for a prosperous year might just come true. Explore the trends shaping your investments in 2024.

As we enter a new year, we consider the following a “wish list”: lower inflation, lower interest rates, higher investment value and, last but not least, peace!

As inflation continues to decline, central banks have signaled their job to battle inflation is almost done and cuts may be coming soon. This change in trajectory ignited a sharp rally in the values of bonds and stocks in the final quarter of 2023 (see the chart below). In certain asset classes (Canadian bonds, U.S. bonds, real estate, Canadian small caps), the Q4 return turned the full year from negative to positive. This once again reminded investors of the importance of staying invested. The U.S. large cap stocks, as measured by the S&P 500 Index, finished the year at 4783, which is 14 points below the all-time-high recorded on January 3, 2022. High inflation seems to be short-lived, along with high interest rates and poor stock performance. So far, it is the consensus that inflation is controlled and rates will be lower as stocks are repricing to represent forward-looking valuations. We will find out if those conditions are met in the coming months of 2024.

Graph of market returns in local currency
Source: Morningstar Research Inc., as of December 31, 2023. Asset class returns are based on the following: U.S. Large Cap: S&P 500 TR USD, U.S. Small Cap: Russell 2000 TR USD, U.S. Bonds: BBgBarc US Agg Bond TR USD, Canadian Large Cap: S&P/TSX Composite TR, Canadian Small Cap: S&P/TSX Small Cap TR, Global Large Cap: MSCI World GR LCL, Real Estate: FTSE EPRA Nareit Developed TR USD. All returns in base currency.

Peace is harder to achieve, with at least two ongoing wars and threats of military action by North Korea and China. Yet, we remain hopeful. Our portfolios are generally positioned for the medium to long term rather than the near term. We do have an overweight position in energy due to company-specific valuations and cash flows, but not due to geopolitical concerns. We expect companies to benefit from lowering interest rates, stable economic growth and ongoing innovation.

Speaking of innovation, Apple is expected to launch its Vision Pro headset in the first quarter. This may be the next “hot” gadget to own after the iPod, iPad, iPhone and Apple Watch. Its failure or success will have a direct and significant impact on the S&P 500’s performance given Apple’s significant weight in the Index. Innovation has continued to drive stock prices higher in the U.S., against traditional wisdom that the performance is all due to the economy. Innovation is hard and fierce in competing for dominance in artificial intelligence (AI). The largest technology giants have all committed to spending on AI initiatives, and that’s hundreds of billions of dollars. This unfortunately leaves small cap companies out of the game. AI chip maker Nvidia is busier than ever trying to meet demand and also upgrading their products to compete. We will hear more as these companies report their Q4 earnings, which will allow us to reassess the “speed of change”. 2024 is set up to be interesting, with less restrictive monetary policies and innovation that may exceed your imagination.

Summary

Central banks have begun to signal that interest rate cuts may be imminent, which already spurred a rally in Q4 of 2023, particularly for Canadian and U.S. bonds, real estate, U.S. large caps, and Canadian small caps. Many believe that lower inflation, lower interest rates, and higher investment values are just around the corner, but only time will tell. Geopolitical concerns could detract from economic stability in 2024, while tech advancements could generate significant value.

About the Author

Alfred Lam, MBA, CFA

Alfred Lam, Senior Vice President, Co-Head of Multi-Asset, joined CI GAM in 2004. He brings over 23 years of industry experience to his portfolio design, asset allocation, portfolio construction, and risk management responsibilities, which include chairing the multi-asset investment management committee and sizing investment bets to drive added value and manage risk. Alfred holds the CFA designation and an MBA from York University Schulich School of Business. He is a recognized leader in multi-asset investing in Canada. During his tenure, his team has won multiple investment awards, including the Morningstar Best Fund of Funds, and saw assets growing four-fold.

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