While the fourth quarter got off to a slow start due to several factors including the Israel and Hamas War, central bank policy uncertainty, and rising oil prices and bond yields — things turned around strongly in November as bond yields declined and equity investors embraced the prospect of a central bank policy shift to lower rates and a potential soft economic landing. Investor optimism for a central bank pivot came on the heels of a second consecutive interest rate pause from both the Bank of Canada and the Federal Reserve at policy meetings in late October and early November, respectively, and recent data releases depicted a slowing inflationary environment.
Impact of the IT sector.
While markets performed well this year, a significant contributor to equity markets came from the information technology sector (IT) and a few technology-like names in the communication services sector, such as Alphabet (Google) and Meta (Facebook). This IT-focused and narrow band of strong performers created a large performance differential between the heavier IT weighted S&P 500 and that of Canada’s S&P TSX Composite Index, which has a very low weight in the information technology sector.
Over the years, the IT sector has been a strong provider of earnings growth and returns. We expect this to continue for the foreseeable future and it’s one of the reasons we have an overweight position in our funds. IT does pose some investment challenges, however, for the eager investor. This can create a lot of volatility in the space, as well as extreme valuations where investors are betting on the next big win. We do not subscribe to this approach, and while investing carries a level of uncertainty and forecast risk, we mitigate the risk by focusing on quality names with several attributes, including strong business models with a demonstrated ability to generate earnings growth. While we underperform at times, we believe in our process and the ability of our names to provide good long-term compounding returns to our investors.
Our 2024 predictions.
For the coming year, we expect the markets to remain reactive to data releases and forecasts as investors adjust positions to near-term expectations around interest rates, inflation, and economic and business growth. We remain positive on the long-term outlook for equities and are constantly seeking out and analyzing opportunities to increase the long-term compounding return potential of our funds. The best opportunities to enhance the future return potential of portfolios are often presented in market downturns or over-reactive volatile periods when discount prices for stocks can be found.
