Market Commentary – Q4 2023

2021 was a great year for global equities. 2022 was a poor year for global equities. 2023 was a great year for global equities. Up, down, up…make up your mind, will ya!  

Conventional thinking would lead you to believe the economic factors that caused markets to go south in 2022 needed to be fully rectified before markets can return to all-time highs. It is also a common belief that the economy and stock market are one and the same. If these two belief systems were true, then global equity markets would have performed much worse in 2023 than they did in 2022. However, in 2023, markets rebounded. Let me explain… 

In 2022, global stock markets faced a trifecta of challenges that led to a market downturn. The first factor was the series of interest rate hikes implemented by central banks around the world in response to rising inflation concerns. As borrowing costs increased, investors became more risk-averse, leading to a widespread sell-off across various asset classes. Simultaneously, escalating tensions between Russia and Ukraine added geopolitical uncertainty, further unnerving investors. The combination of higher interest rates, inflation fears, and geopolitical tensions created a perfect storm, causing global stock markets to experience sharp declines throughout the year. 

In 2023, global stock markets faced a trifecta of challenges that led to a market rebound. The first factor was the series of interest rate hikes implemented by central banks around the world in response to rising inflation concerns. As borrowing costs increased, investors became more risk-averse, but this did not lead to a sell-off across various asset classes. Simultaneously, escalating tensions between Russia-Ukraine and now Israel-Palestine added geopolitical uncertainty, further unnerving investors, but markets trended upwards. The combination of higher interest rates, inflation fears, and geopolitical tensions created a perfect storm, causing global stock markets to experience positive increases in value throughout the year. 2023 global economic news was not much different than 2022. Odd.  

All the factors that caused markets to decline in 2022 were alive and well in 2023. I would argue that the conditions were worse in 2023! Rates were higher in 2023 than they were in 2022. Global conflicts grew from one to two and inflation globally is still poor when you include borrowing costs. But markets were resilient last year. Why? 

Over the long term, earnings and profitability drive stock prices and therefore, have a substantial part in portfolio growth. The factors used to measure economic growth are backward-looking. They measure what happened in the past. Stock markets and prudent investors are focused on the future. Professional asset allocation places money in areas that are best suited for growth over many years and not just one. The economy looks backward, stock markets look forward and the economy is not the stock market.   

The rebound in 2023 can be attributed to several factors. Investors gained confidence as they observed the ability of businesses to navigate and adapt to the changing economic conditions. Additionally, central banks and governments implemented policies to mitigate the impact of higher interest rates and geopolitical tensions, providing a sense of stability. A simple approach that I subscribe to is that, in time, investors will decide to put the bad news behind them. They stop looking at headlines and focus on company fundamentals such as profitability and earnings and not what happened last week, last month, or last year. The history of markets rebounding when the news is bad has been a constant since the inception of global capital markets.  

Regards, 
 
Cory Hill 
Financial Advisor, Associate Portfolio Manager 
T 604 732 6551