Market Commentary – Fourth Quarter 2023

January 29, 2024

The following market commentary is courtesy of the Plan’s Canadian Equity investment manager, Leith Wheeler Investment Counsel Ltd.

Summary
  • This year ended up being a strong one for markets, as evidence of easing inflationary pressures emerged in the fourth quarter.
  • We have witnessed consecutive months in October and November where inflation in Canada hovered just over 3%, marking significant progress.
  • 2023 was another reminder of how important it is to not overreact to short term factors and to maintain a long-term perspective given the volatility experienced during the year.
Commentary

This year ended up being a strong one for markets as evidence of easing inflationary pressures emerged in the fourth quarter. The S&P/TSX Composite, S&P 500 and MSCI EAFE indices climbed 11.8%, 23.6%, and 15.7%, respectively, during the year (all figures in Canadian Dollars). The Canadian bond market also increased 6.7% as yields declined.

The Bank of Canada is likely breathing a bit easier following its turbulent year battling to contain inflation. After trending in the right direction early in the year, a surprisingly strong inflation “print” of 4% CPI in August caught the Bank by surprise. We have since witnessed consecutive months in October and November where inflation in Canada hovered just over 3%, which marks significant progress. The Bank noted in its latest monetary policy report that higher interest rates are doing their job to ease price pressures, and that inflation is coming down, but getting to their 2% target will be slow. The Bank projects that inflation will stay around 3.5% until the middle of 2024 and return toward target sometime in 2025.

While inflation data has been encouraging, it has come at a cost with higher interest rates having the desired effect of slowing economic growth. GDP has effectively stalled in our country the past two quarters and household consumption has been flat. At the same time, recent labour force reports have indicated job growth is slowing, vacancies are moderating, and the unemployment rate has increased from 5.5% to 5.8%. The bond market reaction has been significant as it has gone from pricing in an additional rate hike (as recently as late September) to now pricing in the potential for a cut by March and over four cuts in 2024. As a result, Government of Canada bond yields have declined by over 0.8% since the Bank’s last meeting at the end of October.

It was an interesting year for investors; but through it all, markets finished significantly higher, illustrating several important things in our minds. The first is just how critical it is to get inflation under control before it becomes entrenched in the system. Inflation has been the markets’ primary focus for several years now, and although we are not out of the woods, the progress that has been made has been well received. It is also a reflection that these challenges had been priced into markets and valuations were still reasonable coming into the year. Finally, 2023 has been another reminder of how important it is to not overreact to short term factors and to maintain a long-term perspective. It would have been almost impossible to predict how strong markets would end the year given sentiment only three months ago. We wrote in our last quarterly report that periods of uncertainty create opportunity and that we were taking advantage in our portfolios. That turned out to be the case sooner than we would have anticipated given the significant rally we witnessed in both equity and fixed income markets during the fourth quarter.

Disclaimer

Unless stated otherwise, all data is as at December 31, 2023 and stated in Canadian dollars (CDN$). Provided to the UBC FPP by the Portfolio Management Team, Leith Wheeler Investment Counsel Ltd.