Economic growth in Canada has started the year on stronger footing than expected, though debate over Canada’s weak productivity growth rages. The US economy is forging ahead with unexpected resilience. How long this will last is the question on everyone’s mind with unemployment slowly drifting upwards. The general trend is still one of slowing growth around the world as Europe seems to be flirting with, though not yet succumbing to, a mild recession.
After a slight bounce upward in the second half of 2023, the inflation rate in the US and Canada is slowly coming down again, at 3.2% and 2.8% respectively, and the prognosticators are guessing at when the Bank of Canada and the US Federal Reserve will announce the first cut to their policy interest rates. Inflation in Europe has moderated quite quickly, dropping from higher levels than North America at their peak to a very reasonable 2.6% now.
Key interest rates in Canada and the US have increased slightly in the beginning of the year, with the US 10-year Treasury and 10 Year Government of Canada bonds yielding 4.2% and 3.5% respectively vs. 3.9% and 3.1% respectively at the start of the year. For bond markets, this means a slightly negative performance for the first quarter, with the short bond index down 0.1% and the overall bond universe down 1.7% in Canada. Rising interest rates have also put pressure on real estate investments trusts, with the global REITs index down 1% in Q1.
The US stock market continues to lead the world as the hype over anything to do with artificial intelligence fuels growth in big tech and the semi-conductor industry. The broad US stock market is up a very strong 9.6% so far this year. Though Tesla is coming back down to earth, the rest of the so-called Magnificent 7 continue to defy gravity.
Despite a healthy rise in the price of oil in the first quarter, the Canadian stock market is lagging its global counterparts, with only a 2.4% increase that is similar to the emerging markets index performance of 2.8%. Developed markets in western Europe and Asia have returned 5.4% to start the year, a healthy start despite the concerns about weak economic growth in the region.
Overall, portfolios have grown between 3% and 9% in the first three months of the year, net of fees. Where they have exceeded our rebalancing thresholds, it is generally due to strong US equity performance on which we are taking profit, to bring bond allocations back up to target. As always, a healthy balance between discipline and optimism ensures your portfolio continues to enjoy robust and reliable growth in the long term.
Source: Bloomberg, PWL Capital