Episode 89: A look ahead to 2024—addressing your unanswered questions (part 1)


With 2024 in full swing, what’s our take on equities and bonds?

Rather than sharing our views in our usual way, we’ve adopted a Q&A format to respond to some of the more pressing questions we’ve been getting on the road. Where’s the economy headed? What are some of the main challenges for markets in the new year?

To get your questions answered, tune in to our new podcast episode.  

The opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management Limited, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management.

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Kevin Headland:

Commentary is for general information purposes only. Clients should seek professional advice for their particular situation.

Because we don't write checks anymore, remember the days where you used to write checks the first couple of weeks.

Macan Nia:

Oh, Kev, you're sounding like a grandpa, right?

Kevin Headland:

Yeah. Well, I am right. I'm not quite grandpa, but pretty old.

My daughter received a Magic 8 Ball for Christmas. Most of you are probably familiar with its predictive powers. As we start the new year, investment firms are coming out with their predictions or outlooks for 2024. Some will end up being no more accurate than the Magic 8 Ball, however, this is not their fault, but rather a function of the ever-changing landscape that affects the outcome of investments.

As always, we've received many requests for our 2024 outlook, but this year we thought we would take a slightly different format. Rather than trying to predict where specific markets may end the year, on this episode of Investors Unplugged, we decide to try to answer some of the top questions on the minds of investors, within a context of where we believe the balance of risks lie. If we can get the direction correct, we won't have to worry about the Magic 8 Ball.

Listen on. This is Investors Unplugged.

Welcome back to Investors Unplugged. As always, I'm your co-host, Kevin Headland, and with me is my other co-host, Macan Nia. Macan, Happy New Year.

Macan Nia:

Happy New Year. Happy Festivus. Merry Christmas.

How was your break, Kev?

Kevin Headland:

It was good. It was good. How's about yourself?

Macan Nia:

Yeah, it was nice. Too short, yeah, as always. But yeah, it was really nice. Could have been a little bit colder. I can't believe I'm saying that, but-

Kevin Headland:

If you're a skier, you like skiing, so I'm happy. This is great weather for me for Christmas.

Macan Nia:

Yeah, it's all slush out there right now, but first world problems. But yeah, it was a nice break. Always too short. 2023 is in the rear-view mirror and we look forward to 2024, and what the markets, equities and bonds are going to provide for us.

Kevin Headland:

Always interesting to figure out what's going on, and wanted to take the time to also to wish our listeners a very happy new year, and hope they had a great time off with friends and family, and are all looking forward to the start of 2024. I think we ended 2023 on a good note, both equities and fixed income, and although we are recording this on January 3rd, and the year has not started off too great so far, hopefully this is not a foreshadowing of the year to come.

Now one of the things we started off, I think it was last podcast, or brought it back, was the What You Need to Know, and that was one thing that we had heard that was nice to have in our podcast a little bit outside investments. We're going to have one What You Need to Know per episode, and today it's my turn, and as I allude to in my intro, talking about the Magic 8 Ball, which my daughter received as a Christmas gift this year, and I thought it was a great idea for the idea of having forecasts around this time of year, and a Magic 8 Ball, and just looking about researching the Magic 8 Ball, and saying when did it come around?

Macan, do you know when the Magic 8 Ball was actually invented?

Macan Nia:

No, but I will say in the '70s. It seems like a '70s type of toy.

Kevin Headland:

It kind of does, like the pet rock and all the other stuff.

Macan Nia:

Yeah.

Kevin Headland:

Actually 1946, yeah, so it's been around for quite a while, and it was interesting. It was invented by a person by the name of Albert C. Carter, and it was inspired by this, apparently ... I don't know what this is ... a spirit writing device used by his mother, who was actually a clairvoyant, so this inspiration from his mother.

And the other thing it was also, I didn't realize, is you're not supposed to actually shake it. You're supposed to just hold it and then flip it up to get the answer. So that was one thing. It created too many bubbles apparently. Now it's been fixed recently, where the most recent versions don't have as many bubbles, but still you could see that why you're not supposed to shake it up.

The other thing that really surprised me, and this was I did not know, was the amount of outcomes that exist in this somewhat small little plastic ball. Do you know how many outcomes you could actually have to your question, Macan?

Macan Nia:

I thought it was just four. Isn't it just a little triangle in it and-

Kevin Headland:

Yeah, no, there's 20 different outcomes apparently.

Macan Nia:

So there's multiple dies in there?

Kevin Headland:

Apparently, yeah. And the interesting is, you'd think it's all even, right? So 20 outcomes, you'd think was equal between positive, negative, and noncommittal, shall we say? It's actually not. 10 of the 20, so 50% are positive, five are noncommittal, and five are negative.

I thought that was also interesting when I think about the markets, because over time the odds are in your favor to be more positive. So again, if you ask the question of Magic 8 Ball more often, the odds are that you'll get a positive answer eventually, because 50% of the potential outcomes are positive. So I just thought that was quite interesting about the Magic 8 Ball and the history, and really about the link perhaps to our forecast, our outlooks for the year, which are sometimes correct, sometimes direction correct, sometimes complete out of whack.

Macan Nia:

So let's talk, let's transition to that, last year ... so how did we do last year in terms of our forecast? I think we were pretty bang on. I think it was one of our better years, in terms of forecasting.

So to start the year, we thought equities would be up mid to high single digits. I know I was the one that was a little bit more optimistic. I'm patting myself on the back. I thought the risks were to the upside. When we ranked the world, we ranked them basically ... and we're using same risk return profile, so we're not lumping an EM in a developed market bucket.

So we thought US, Canada, International, that pretty much played out. The US, number one. Where I guess we may have been slightly wrong, was international did do better than the TSX. So when you look at the TSX up six-ish percent, and international, being Europe, was up ... I think TSX actually was up eight-ish percent. And when you look at Europe, it was up in the low teens, so directionally we are correct on that, but maybe the degree maybe not as much.

And when it came to bonds, we said mid to high single digits, and up until November we were really wrong, and then it's funny, Kev, how markets need patience. Talk about that bond opportunity rewarded those who were patient, because you got, depending on which bond indices or proxy you're investing in, but you had bonds minimum return of, I think, 4% was the US EGG, all the way up to low teens.

So on average it was that mid to high single digit, which was our view, but you had to wait for it. You basically got none of it until November.

Kevin Headland:

Well, I think it's also important to show that it's about that patience and long-term investor, and 12 months seems like a long time, but it's not, right, and understanding that eventually we thought things would work out, and fundamentals. And I think that's key is, opinions are great. Everyone has an opinion that's perfect, but it's important to make sure there's some kind of proof points, or at least some support to your opinion, right?

It's like debating, you can have an opinion and think, "Okay, X, Y, Z is going to happen," but why? Try and explain your thought process, and we had a thought process, especially around fixed income, and it wasn't working for quite some time, and eventually the market started pricing in changes to the Federal Reserve and whatnot, and fixed income started to rally, and it rallied quite strongly in a short period of time. And if you were waiting for that shift to happen, and tried to get in, more so than equities I would say, you can't be late to fix income, you got to be early because it moves so quickly, so fast, it just doesn't let you in. So that's something to remember.

Now looking at what we're thinking about this year is, of course, everyone asks for our forecast, I think, starting probably in early December, what are we thinking about 2024 and again, we are not using Magic 8 Ball or any crystal ball, we have our views, but we thought we'd go about it a little different this time around, where, instead of just saying, "Here's our opinion, here's our outlook, here's where we think things are going," trying to predict performance or actual index levels, we decide to try and answer some of the more pressing questions that we seem to be getting when we're on the road through the end of this year, and what we expect to see, or expect to hear, as we start meeting with advisors and their clients early in 2024, so that was where we had the idea of this.

So kind of like an FAQ, or Frequently Asked Questions kind of format. And that will I think lead us into our first question, and how we look at things from the broad macro level, and work our way down, this kind of funnel is our view of the economy and where things are going, and to this, we actually, of course, leverage our expertise through Frances Donald and her team, and as experts in turn of macro strategy.

So Macan, maybe I'll throw it over to you, and talk about what their views are and how that aligns with our outlook for the macroeconomic environment for 2024.

Macan Nia:

Yeah, I think, Tim, let's make it simple, and simple in the fact that try to anyways, but simplicity I think often works well when it comes to investing, is that as we enter ... let's quickly go back to 2023. First half of the year, economies were stronger than what many expected, and as a result, that ties in with the bond thesis not evolving at the pace that most people thought. Let's not rehash that. But you started seeing a slowdown in the second half of the year. Manufacturing is already indicating recession, and you start seeing a slowdown in services, as we entered the second half of 2023. I would say the last couple months too, Kev, when it comes from an employment perspective, the job market, which has been extremely resilient, appears to have some cracks in the armor, job openings, quit rates, things of that nature. That's something I think we'll be paying very close attention to. It's typically a lagging indicator, but I think it's that one that confirms that, okay, we are going to get a slowdown.

Now as we enter 2024, the general view is, "Let's not fixate on this notion of recession or not." We don't even need to as investors. All we need to determine thankfully, is are we going to get a slowdown, and if we do get a slowdown, our yield is going to drop, which we will talk about in the fixed income, we think that's the case, and if we do get a slowdown, what does that mean for basically corporate profits? And that's going to have a view when it comes to equities, but also if you do get that slowdown, and this was a lot of the rally that we saw in November and December, is the pricing in of a pause, which was priced in, and at some point, cuts and maybe more cuts, and that will be obviously the second tailwind for equities and for fixed income.

And when we look at the environment for 2024, it's hard to see too many upside catalysts for global growth. If anything, there's probably more downside catalysts. You add in the geopolitical risk, and when you add in politics.

So generally I think for 2024, our broader team's view is, we do continue to get a slowdown. The second half will be interesting, right? Or the last quarter will be interesting, to see if we get these cuts, whether it starts impacting in 2024, but I think the general theme for 2024, if it's going to be a stagnation, acceleration, or deacceleration, the broader team's view is we believe there's going to be a continued deacceleration in the global environment.

Kevin Headland:

Yeah, it's hard to make that call of a recession or not. Of course, everyone wants that call to happen, especially if when you're asking the chief economist for major financial institutions. But as you said, I think it's about the path of least resistance, or the balance of risks, that we talk about all the time. Are we in expansionary territory or slow down? And we would say slow down, and Frances has put out this great piece called the Five Macroeconomic Themes for 2024, a new economy is rising, so I invite those that are listening to go to our website and look at those themes, and we try and identify again, some of the risks that we see, or some of the major themes from a broad macroeconomic strategy for 2024 and perhaps beyond, as we don't know timing, but we at least identify some of the risks out there, and one, protect against some of the risks, also take advantage of some of the opportunities that these themes provide. And sometimes opportunity is to be more conservative in our investments, but also that's important to understand. Now of course-

Macan Nia:

And we know there's tons of cash on the sidelines, too, to take advantage of these opportunities. I think retail money market funds ... this is statistics for the US, I bet you they're very similar for Canada ... they rose almost 50% over the past year. There's roughly $2.2 trillion just sitting on the sidelines.

Kevin Headland:

And as we outlined just before, that you talked about the performance, so all that money's sitting on the sidelines, and missed out on some of the performance, and again, sometimes you think this uncertainty is going to lead to weak down markets, and there's a lot of people that thought there'd be another shoot-a-drop, shall we say, in 2023, after the way 2022 ended, but that's obviously was not the case.

Macan Nia:

Kev, you know how uber-bullish I was, what I've said that Nasdaq would've been up plus 40%, S&P 24, you had the Nikkei up 28, Europe 15, it was a very, very, very good year last year for equity markets, and I don't feel like people feel that way. And I think that's because some of that is there's cash on the sidelines.

Kevin Headland:

Well, I think there's also, again, that negative viewpoints of talking about recessions, and weaker economic data, and we are seeing that, but one thing actually that also you would think perhaps was a catalyst for at least the first half of the year, the belief that markets would do well, was inflation and this notion of the stick your inflation would ever come down. And I think that's one thing we're looking at already, is this change in at least the trend and does it get to 2% targets? Who knows, and doesn't matter, because the key is directionally are we in a disinflationary environment or re-inflationary environment?

And I think that's another key point that leads us to our equity and fixed income outlooks, is our view on inflation.

Macan Nia:

Yeah, and I think 2023 was where we finally begun to see that global disinflation, and we've seen it come off materially. That was probably the easy battle against inflation. This next leg down towards the Fed's target will be a tough one, and it'll be a tough one, because what's driving inflation or the sticky levels of inflation at this point, are things that are outside the Fed's or any central bank's control, when it comes to monetary policy.

So one thing that our broader team has discussed is, are they going to be stubborn in the fact and say, "Okay, we're not at two. Two's our target. The US economy is slowing. There's cracks in the employment market, but we're going to keep rates at these levels or keep increasing them, until we get to two," and our team's broader view is no. In the face of a slowing economy, it's very hard for us to envision a Federal Reserve that will reignite the increasing of rates.

I think we'll look back and we'll say, "Okay, inflation's around 3%, and they were cutting in economic weakness," so that's something, I think it's going to be a very interesting thing to follow in 2024 is, they're not at their targets. It doesn't mean they're going to keep raising rates because they're not at their target.

Kevin Headland:

I think it's also something that'd be interesting is kind of this, sometimes textbooks have to be, I don't say thrown out the window, but it's important not to be completely focused on the textbooks. Last time this happened, this happened, and you talked about some of the things that are out of control, right? Climate change, and ESG, and geopolitical risk, these are all inflationary, reshoring, supply chain management, that has nothing to do with central banks, that's just a nature of the changing global landscape. I think it's important that the central banks don't only focus on one specific thing, before they realize that perhaps they should start to, not necessarily reduce rates in terms of to spur economic growth, but start to at least normalize.

They don't need to be extremely tight anymore, and I think that normalization is an aspect, and if things happen the way we expect in actually a weaker economic environment than many expect, then they have the room to actually cut rates a little faster, and then help the overall economy, at least from consumption perspective and other aspects, decrease interest rates, make it more affordable for housing, especially in Canada, so these are some of the things that we expect to happen perhaps on the inflationary front in 2024.

I got to remember, keep saying 2024, because we don't write checks anymore. Remember you used to write checks the first couple of weeks-

Macan Nia:

Oh, Kev, you're sounding like a grandpa, right?

Kevin Headland:

Yeah, well I am, right? Not quite grandpa, but pretty old. But you used to write in the first couple of weeks or even months, you're like, "Oh crap, wrong. 2024." You had to change the date all the time. I don't know if you ... you're probably too young to remember that.

Macan Nia:

Oh, I am and I'm not.

But I think the interesting thing for me in 2024 will be this notion of, I just don't think we're talking about inflation. After years and years of inflation being the primary driver of both equity and fixed income returns, in terms of catalysts, I think this will be the year that we stop paying as much attention, because in an environment that the global economy is slowing, where's the path of least resistance for inflation, and our team's view is flat to [inaudible 00:18:17]. And I think generally that will be positive for both bonds and equities.

Kevin Headland:

I will be quite happy to get the inflation narrative, or at least the over discussion, shall we say, about inflation and direction and targets behind me. I think we can get back to fundamentals. I think that's key, right? Looking at actual fundamentals of the investments, and the underlying investments, and where equities are going, more so about the valuation and earnings aspects, rather than inflation, how it's infecting central banks, and what that impact has on valuation and whatnot.

 So I think that's a great segue in terms of equities. So what is our equity outlook for 2024? We were fairly positive last year. Of course, Macan, you said you were extremely positive, and that was a good notion. It's always good to be more positive than less, and especially when it proved to be right. So that always is a nice feeling as we end the year, and a little pat on your back for getting that extremely positive return call fairly correctly.

So going in 2024, the views are positive again, pretty much as we see. Again, it could be a timing issue. Do we get the slowdown early on? Is a slowdown recession extrapolated through most of the year? So that could be an issue, but overall, I would say a fairly constructive outlook on equities.

Macan, why don't we talk about the earnings environment as we start with looking at the fundamentals.

Macan Nia:

Yeah, I think, Kev, you nailed it, too, is it's always hard to ... you can have a view for a calendar year return, and then obviously everyone always chasing it, difficult to say when's that return going to happen? And what I've realized over the years, how many times have ... and we've done this too, in terms of, "Oh, it's going to be a tale of two halves. First half, it's going to be great, second half's going to be bad," and it rarely pans out the way that anyone forecasts, from when the return is going to happen.

I think we have much more confidence in the entirety of the return in terms of, okay, for 2024, I think we believe that the equity markets are going to be favorable. You're going to have above likelihood of above average returns, around plus 8% for both US, Canada, international, and now there's going to be relative attractiveness, but that's also going to play out, too, on what period. Is it going to be the first three months of the year, the last.

I think generally in the near term there may be more downside pressure. I know January, from a seasonality perspective, is a very good month for markets, but February, March are not, so I anticipate ... look, Kev, markets ran really hot the past two months of the year, on the expectations of the Fed pausing and then cutting, and I think some of that euphoria, well we're going to have to earn it in the first early part. I think there's going to probably be some more near term pressures in probably the first couple quarters, but I can see by the end of the year, again, you're going to be very happy with your returns.

And when we look at the earnings environment, I think, despite sluggish growth in 2023, earnings proved to be really resilient, right Kev, and why? Because there was a lot of expense management initiatives.

I know Manulife went through one. There's a lot of Canadian banks, Canadian corporations, US corporations. Moving forward, earnings growth is unlikely to benefit from further expense management. There's only so much you can cut. So we think S&P profit margins, TSX profit margins, that are currently at elevated levels, not historical levels, but elevated levels of 12%, are going to be squeezed. Now are they going to be squeezed by higher wages? Are they going to be squeezed by higher level of interest rates? Slower growth? We think generally, Kev, I think it's going to be the slow growth of those three.

I know wages, people keep talking about wages. Wages are coming down. So the Atlanta Fed Wage Tracker peaked at 6.7%, I think it was the summer of 2022, and now it's fallen into low fives. Likely, if we get a slowdown, there's going to be a decrease in wages. Everyone always points to interest rates and that's fair, but the reality is, look at the S&P. Almost 50% of the outstanding debt of S&P 500 companies matures in six plus years, so this is not an issue for them. We think margins will be suppressed, based on slower growth. So that's going to be a challenge in the early parts of 2024, but I think better as we go into the second half of the year.

Kevin Headland:

I think that's the other thing is also, as you talked about, is expense management, and when you get that first margin protection level through expense management or expense cutting, that's the easy part, right? Pretty easy to cut expenses. You look hard enough, you can cut a lot of fat, especially when things have gone really well.

The next issue is top line revenue growth, and the companies who are generating cash flow. And I think the other thing we think about 2024, and we started seeing at the end of 2023 actually, is this notion of quality businesses, the good businesses, lower debt, good profitability, perhaps better position in their marketplace, dividend growers, you start to see those companies start to perform better. And we all saw this chart last year, we used it a bunch, it was showing the top 10 companies in the S&P 500 versus the other 490 names.

And I just ran the data as of the end of the year and, of course, we had the S&P 500 return on a price basis 24% and change. The top 10 names were just a hair under 16%. The other 409 names generate eight and a half percent return, and that was actually the largest share of overall return for the year. So we started seeing this rally through the end of the year ... you said the last couple of months ... it was shared. It wasn't just the top 10 names, so perhaps we already started seeing this rotation in other businesses, as we found perhaps unloved companies that hadn't seen their returns move higher like the top 10 names.

And maybe that's the playbook for 2024. It's not just about the top 10 names, or even the index level. Perhaps it's more a stock picker's market, that try and generate those returns.

Macan Nia:

And that's what gives me optimism for 2024, Kev, is the participation that we started seeing towards the end. We all know the magnificent was a magnificent seven eight. It changed throughout the year, but it was a primary driver of returns.

So in November, December, started broadening out to the S&P, let's call them 490, the Russell Mid-Caps, small caps. You saw a broadening out of the return, and typically that historically has signified not bottoming of them, because we're at at near all time highs now, but that the rally can continue in the future.

Kevin Headland:

Yes, the breadth of the market is a good barometer for the health of the overall market. When it's led by a couple of names, that's usually not supportive of a stronger, longer term bull market, shall we say.

Macan Nia:

And then let's transition to valuations, too. So we've had this incredible rally. The good thing is, Kev, valuations outside of maybe the S&P 500, which is basically ... there's a massive difference between the market cap weighted and the equal weighted valuation. But the rest of the markets out there are not expensive. Some continue to be cheap, some are at their fair value, and then that's a positive thing for returns over the next couple of years.

Kevin Headland:

Yeah, I think as we updated the data to the end of December, valuation perhaps in both Canada and the US sticks out at maybe a risk to those that are calling for a near term fall, or perhaps a correction, or something in the near term. Maybe it's based on valuation. So that is one area, but also valuation is often elevated in anticipation of better things to come, especially on the earnings side. It's a leading ... valuation moves in anticipation of something else, and perhaps earnings will grow into that.

But again, it comes back down to specific companies. I can say that the S&P 500 or TSX is expensive relative to history on an index level perspective. That doesn't mean that everything is expensive. But also at the same time, be mindful about, if something is cheap, sometimes it's cheap for a reason, right? So valuation has to be a combination of valuation and earnings, to drive your investment decision. It's not one or the other. It's both those together, amongst other things, to make sure that we're well-positioned in taking opportunity in our investments.

Macan Nia:

So let's talk about, Kev, talk to us about the illustrated portfolio from the equity perspective. We make changes every quarter. We decided not to make any changes as of December 31st. Walk us through the equity weight within the model or Illustrated portfolio, and the regional exposure.

Kevin Headland:

So we're still 50/50 equity/fixed income. I think we still want to be fairly conservative, again, because of the overall weakening economic landscape. It's not time to take on risk, so we want to be more conservative, and again, more defensive. So we're still 50/50.

And then equities remain very diversified. I'd say 20% US, 15% Canada, and 15% international including emerging markets, and that's again, back to the idea of, we don't see an obvious area, geographically speaking, to take on additional risk. I think it's about looking at it from a global perspective, and look at the individual companies, regardless of where they exist, and I think that remains our narrative for the near term, given where the markets are.

Macan Nia:

Okay, so you have, I just said $2.2 trillion in the US sitting on the sidelines. How do you allocate that into equities today? What would you say? Do you dollar cost average? Do you-

Kevin Headland:

That is always the hardest question. Yeah, again-

Macan Nia:

What would you do?

Kevin Headland:

Listen, if I'm right now, after the valuation move recently, I'd be dollar cost averaging. If this was two months ago, I'd say our valuation looks attractive, go all in. But also, if proven, history's proven that over time, the best way is get in as early as possible, and benefit from the compounding effect of money over time. But you can't be looking at day-to-day movements in the markets either if you got it all in.

How about yourself, Macan?

Macan Nia:

Yeah, I think I would put 50% in today, right? If our view is that we think-

Kevin Headland:

Sorry, I didn't know I could choose ... if I was one or the other, I didn't know there was a mix I could do.

Macan Nia:

No, no.

Kevin Headland:

Oh, wow.

Macan Nia:

It's our podcast. You can do whatever you want, within reason.

But if our view is of 2024 of above average returns then, and that above average return allows my client to meet their financial goals, then I'm going to put 50% of it in now, and then I'm not sure whether I'd dollar cost average the rest. I would probably wait for a bit of a pullback. Markets have rallied tremendously. If you get that five to 10, then I would put the rest in. But again, every year, I think you're just better off putting a vast majority of it in on Jan first, especially, Kev, in an environment that the central banks across the world are probably done raising rates, and are likely going to be cutting rates.

Now when can be up for debate between the central banks, and to what degree, but that's a positive thing generally for markets. Don't fight the Fed.

Kevin Headland:

I think that's one of the keys as well, is this idea of balance of risks. So what are the risks that exist still? Okay, rising rate environment is, I would say, likely, probably behind us. Rising inflationary environment, likely, probably behind us. So those were the major risks to the markets over the last few years. This is the fear that was out there.

So if those risks are behind us, then again, if there's less risks ahead of you, then that's a positive momentum factors, and there's going to be pockets of other risks that pop up, that's for sure. But those are the major factors there. So when I look at that, yeah, things are good, and the key is, I think, regardless of how you get the money in, it's get the money in, don't be sitting on the sidelines. And I think that's the biggest factor is, if you've been sitting on the sidelines over most of the last year, you missed a really good opportunity.

Macan Nia:

Yeah, a hundred percent. So yeah, actually I think 2024 is going to be a really good year for equities and bonds, and how it all turns out, I don't know. There are so many things. I think of, Kev, last year ... this is a perfect example ... who would've thought AI would've been such a powerful positive catalyst for markets? No one. Literally no one. But there was, and there's going to be another one. And generally there are more positive catalysts than negative ones, and typically the negative ones are fleeting, typically when they come to geopolitics. The one that has that longer lasting is when they're raising rates, which we saw, or a severe recession. And yes, we're calling for a slowdown, but I don't see any signs of a severe recession, outside of a systematic risk to the markets, and what would the Fed do in that period? Dump liquidity into markets, which is short-term pain, but will be better off for markets a month down the road.

Kevin Headland:

Yeah, and it's good news also is there's a lot of room for them to cut rates given where they were and where they hit in terms of tightening, so there's a lot of availability to reduce or loosen monetary policy to help in those areas where there might be some esoteric risk, where there's a shock to the market, there's liquidity available, and I think that'll help. And that's one of the major risks, and the one we get all the time, especially every four years, is this discussion about, "Well, what about the risk to the markets during a US election?" That's the big topic as we go into 2024.

Macan Nia:

Well, you don't have to be so condescending when you say that. Wow.

Kevin Headland:

I know, but everyone asks me, "Oh, my god, it's a US election," and I say this story all the time, and I'm going to bring it back, because I love this story. It's kind of fun. It brings me back to 2016. November, 2016, I'm actually in the Dominican Republic, on vacation during the US election, and perhaps one of the most important ones in recent history. It's because I am Scottish and also cheap, and my daughter was turning two the week after the US elections.

Now, Macan, you have young kids. Do you know what happens when your kids turn two?

Macan Nia:

Specifically?

Kevin Headland:

More so when vacations.

Macan Nia:

Oh, you got to start paying for your seat.

Kevin Headland:

You got to start paying for a plane ticket, right? So that was the last week I could take my daughter down south for free before she turned two. So that's why I'm in Dominican, and leading up to that 2016 election, the talk was all about, "What's going to happen to markets when and if President Trump gets elected?" And we saw what happened. Markets were [inaudible 00:33:28] for over the night, and then they jumped by the time the markets opened the next morning. So elections have very little to do with markets, especially over time. We've looked at it in terms of going back to, I think it was 1945. The average return is 12.5%, and the average return was 14% and change for a Democratic president, and just under 11% for Republican. And that seems like a little bit of difference, but really, grand scheme of things, not that much.

So we've done this, and we've done this in the past. We've looked at elections, and say, there's a lot of talk. There's a lot about policies and whatnot, how they might impact individual companies, but overall, the election outcome doesn't typically impact the markets to a degree that some would expect, given the amount of questions we get on the impact of elections on US equity markets.

Macan Nia:

Yeah, when you look at, Kev, the last 20 election years, so that would go back, I think, to the late '30s. There's only been two election years that there was negative return. One was with Bush in 2000, and I guess it would've been, that was basically the Great Financial Crisis in his election year, and then two years before. But other than that, it's only been positive, and people say, "Well, this is contentious. Who knows who's going to be running for the Republicans? Who knows who's going to be running for the Democrats," to be honest. But I could say each of the past three US elections have been contentious, whether it was under President Trump, or either term of President Obama. And in either three of those, you saw returns that were positive, and they were up ... let me think ... they were up ... I'm going to round them, Kev ... 16, 12 and 18%.

So there's this narrative that yes, it's contentious, there's been a polarization, but it seems like it's been that, Kev, for the last three elections, and the market was still able to look past that, and churn out a positive return. You use 2016 as a good example. Look at Brexit, another great example of political uncertainty that created some volatility around the date, but a couple of months afterwards, there was no semblance of it. And I say unfortunately, given the political, the geopolitical things that have occurred over the past couple of years, the conflict in Ukraine, what's happening in Gaza, and again, has very little impact on the medium to long-term, from an investment perspective.

Kevin Headland:

It's interesting you mentioned Brexit, because this is also one interesting. It's not just the US that's going into an election this year, but apparently, according to Bloomberg Economics, voters in countries representing around 41% of the world's population, and 42% of Gross Domestic Product, are going to be electing new leaders this year.

Macan Nia:

Yeah, the GDP one makes sense, because of the US, and that's like ... but what's other one-

Kevin Headland:

41% of the world's population, which is yeah, US, but no-

Macan Nia:

But US is only 300, 360 million. Is it China or India? Well, not China, but India?

Kevin Headland:

I'm not exactly sure. As I said, it's according to Bloomberg Economics. This is something I read. Now you're testing me here. I didn't do the research myself. I didn't look and calculate every person or country.

Macan Nia:

Is it Indonesia? Is it Nigeria? We're going to get answers for you on that one. Maybe we can't ... sorry, go ahead.

Kevin Headland:

No, I was going to say probably not, but okay, you go ahead do the research. I welcome it.

But anyways, there's a lot of elections happening. That's the key, and that's going to be, perhaps newsworthy, headline worthy, but as always, it's important, let's look past that type of stuff and look at it, and there's other risks, going to be geopolitics risk. You mentioned that briefly, but we're going to hold that off, because this is only part one. This is part one of our FAQs, and it's going to be posted in time. When this podcast gets posted online, please go and read it. We'll be posting on our LinkedIn, but it's a lot to cover, so we want to make sure we cut this in two parts. We want to save a second part when we're going to talk about fixed income, geopolitics, and what we think is going to happen with the currency, the Canadian dollar, in 2024.

Macan, anything to add? It looks like you wanted to talk there.

Macan Nia:

No, that's great. Actually, one last thing, Kev, if you had to choose, so typically we're talking core holdings, right? But we all have asset allocation dedicated to alpha, and we typically look at alpha through three lenses as investors, Nasdaq, mid caps, emerging markets. Where would you position in 2020?

Kevin Headland:

It's funny you say this, because I was thinking about bringing back perhaps our Fearless Forecast podcast, and I'm looking at emerging markets, and again, this is a Fearless Forecast-

Macan Nia:

Don't say it, Kev.

Kevin Headland:

Listen, if China ends up throwing a bunch of stimulus-

Macan Nia:

Oh, gosh.

Kevin Headland:

... at their economy, that tends to be good for overall markets. Again, it's ridiculously volatile, but I'd love to say Nasdaq, but they've gone so good so fast and they continue that. I'm less alpha than you are. I'm more conservative in my approach, Macan, because I'm hopefully closer to my retirement, but I'm just trying to get the average returns and double my money every 7.2 years with 10% returns. I'd be happy with that. Where are you putting your alpha?

Macan Nia:

I'm never touching EM again. I don't care what the opportunities are. It's just, you get burned so many times based on valuations, and, "Oh, they're going to put stimulus. Oh wait, you went after the tech industry. Oh wait, they went after this."

So I rather get my exposure to quality emerging market companies through a blue chip mutual fund, or whatever. Nasdaq, I like, but I think the challenge with the Nasdaq is we already own enough of it in our asset allocation, whether it's just your broad based S&P 500 ETF, 30% of it is basically Nasdaq light. So it's not a knock against Nasdaq, it's just that we already, from a portfolio construction perspective, we own too much of it.

And then so I naturally go to US mid caps. Yes, the US economy is slowing, but it's not going to go into a severe slowdown. We think the prospects of improving situation happen in 2024, probably towards the end, but to your point, Kev, there's a lot of good quality, US mid cap companies that are still doing well. Top line growth, bottom line growth, valuations is still attractive, and now they're starting to participate. So I think when I look at my alpha generator, very similar to last year, it's US mid caps. Nothing against Nasdaq, it's just we already own enough, and yeah, we can look back at EM, probably has doubled or tripled the returns of maybe US mid caps, but there's also the fact that it could also have the exact opposite effect. And when I don't need that size of 30, 40 plus returns, I'm okay leaving that to someone else.

Kevin Headland:

It comes down to speculation versus investing, I think, when I look at some of the emerging markets, a lot of it's speculation. I just ... again, hey, if you're going to throw money in the wind, go for it, but that's not, again, as a portfolio construction perspective, I can't disagree with you, and I think patience will rule the day once again, right? If you're going to be building portfolio today for the end of 2024 or beyond, make sure we focus on that timeframe, and don't make knee jerk reactions to short term disruptions that might exist.

So I think that's a good place to end it. Please listen to part two, and we're going to cover the rest of our Frequently Asked Questions, outlook for 2024.

Once again, for Investors Unplugged, this has been Kevin Headland-

Macan Nia:

And Macan Nia.

Kevin Headland:

Have a great one, guys talk soon. Take care.

Macan Nia:

Take care.

Kevin Headland:

This podcast is provided as a general source of information, and should not be considered personal, legal, accounting, tax, or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Investors should seek the advice of professionals prior to implementing any changes to their investment.

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Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist

Manulife Investment Management

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Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist

Manulife Investment Management

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