The Market

The first quarter of 2024 echoed the familiar optimism that marked the conclusion of 2023. Despite lingering concerns of sustained higher interest rates, there was a prevailing sentiment among capital market participants that these rates, though at multi-decade highs, signaled a resilient global economy. This contrasted sharply with the widespread pessimism of just a few years prior.

Job growth in the US remain robust, adding 303,000 jobs with wages climbing now for the 39^th straight month with no inflationary pressures on the horizon.  Canadian job numbers, while slightly more subdued, failed to dampen the overall positive sentiment.  The S&P500 soared by 10%, while the S&P/TSX Composite climbed by 7%, both nearing all-time highs by quarter-end.  Against all odds, global economies have defied expectations, managing to stave off a recession that seemed inevitable given the prevailing economic data and trends.

Conversely, fixed income markets diverged from equity markets and have been under pressure due to the uncertainty in possible policy rate cuts this year which pushed yields up and resulted in Canadian bonds finishing the quarter in negative territory.

The table below shows the market performance as of March 31, 2024, in Canadian dollar terms:

Performance

The table below compares the YouFirst portfolio composites with their respective FPX Benchmarks:

In the initial months of 2024, the YouFirst Growth composite showed a slight lag behind the FPX Growth benchmark. This was mainly attributed to our limited exposure to a few top constituent companies of the S&P500 index, notably NVIDIA and Meta. Their stocks experienced a surge propelled by the fervor surrounding advancements in artificial intelligence. Meanwhile, stalwarts like Microsoft, Amazon, and Alphabet, which are part of our portfolios, maintained their robust performance for yet another quarter. Their solid fundamentals and strategic positioning to capitalize on advancements in artificial intelligence contributed to their continued strength.

Conversely, the YouFirst Conservative Growth composite outperformed the FPX Balanced benchmark. This can be attributed to our ongoing underweighting of bonds. Additionally, the optimism surrounding potential interest rate cuts by policymakers in 2024 has somewhat diminished, exerting downward pressure on bond prices and causing the benchmark to underperform.

Portfolio Activity

As discussed in our Q4 2023 newsletter, our positive outlook on select equities over fixed income remains unchanged. Building on the momentum from the previous quarter, we have bolstered our allocations to growth and dividend-paying equities across the board. Specifically, we have acquired units of either the Manulife (Mawer) Global Equity Class (MMF4606) or the Manulife (Mawer) Global Equity Private Pool (MMF4027). Additionally, we have increased our holdings in established Canadian dividend growth stocks, including Telus (T:TSX), Fortis (FTS:TSX), Bank of Nova Scotia (BNS:TSX), TD Bank (TD:TSX), Enbridge (ENB:TSX), TC Energy (TRP:TSX), and Manulife Financial Corp (MFC:TSX).

Despite the ongoing pressure on these stocks resulting from the current interest rate regime, we believe that we may have reached the peak of interest rate policy. In the event of a decrease in rates in the latter half of 2024 or early 2025, we anticipate a favorable rebound in these stock prices, assuming all other factors remain constant.

While market volatility is expected to persist due to the fragility stemming from the hawkish central bank policies of 2022 and 2023, as well as ongoing geopolitical tensions, there are signs of improved relative strength and confidence. Central banks have halted their rate increases and are shifting towards a more dovish stance, contributing to this positive shift despite the prevailing challenges.

Outlook

The beginning of 2024 ushered in a positive risk sentiment among market participants, buoyed by declining inflation figures in both the US and Canada compared to pandemic-era highs. There’s a possibility that inflation could converge towards the 2% target level of many central banks. Should inflationary pressures continue to diminish, central banks might initiate policy rate cuts, presenting a favorable environment for stocks, particularly those in rate-sensitive sectors that have suffered most since the onset of rising rates in 2022. 

In March, the US Federal Reserve adjusted its forecasts, indicating the possibility of three quarter-point rate cuts this year, despite upward revisions to inflation and growth projections for the economy. Consequently, economists have revised their expectations for S&P500 earnings growth upwards for 2024, with the technology sector anticipated to contribute to over 50% of this growth.

We continue our view to remain cautiously overweight equity and will top up portfolios that require additional equity while holding asset allocations for portfolios that are already fully invested.  We think that investor patience will be tested over the coming months as the market becomes even more attuned to the macroeconomic landscape.  Any deviation from the positive narrative established in recent months is likely to trigger volatility, presenting buying opportunities when timing is opportune.

For clients seeking income in their portfolios, we continue to exercise selectivity and patience in adding dividend growth stocks and fixed income securities. We favor high-quality, mid-duration corporate debt while steering clear of long-duration bonds and high-yield credit. As interest rates decline, the return on high-interest savings accounts, currently offering up to 5% interest, will also diminish. Consequently, we may need to pivot towards riskier assets to meet return expectations for portfolios.

Yours Sincerely,

Simon Chun, P.Eng., CFA
President, Portfolio Manager

Doug Garner, P.Eng., CFA
Chairman, Senior Portfolio Manager

Jane Garner, BA, EPC
Client Experience

¹ BENCHMARK DISCLOSURE

Monitoring your portfolio’s performance by comparing it to a relevant benchmark is essential. A benchmark is an independent standard for evaluating performance, often represented by indices like the S&P/TSX for Canadian stocks, DEX Universe for Canadian bonds, or S&P 500 for U.S. stocks. To ensure meaningful comparisons, the benchmark should closely reflect the asset classes and allocation in your portfolio since most investors don’t have 100% of their portfolio in bonds or stocks alone.

Given that most investors have diversified portfolios, a percentage return alone doesn’t indicate true value. Comparing your portfolio against a passive benchmark provides a clearer picture of its performance. For example, if the benchmark returned 7% and your portfolio 8%, your portfolio performed well.

At YouFirst Financial, we use the Financial Post Index Benchmarks publicized by the Croft Group, specifically the FPX Balanced and FPX Growth. These benchmarks reflect commonly accepted asset mixes: 10% cash, 40% fixed income, and 50% equity for balanced investors, and 10% cash, 20% fixed income, and 70% equity for growth investors. They are rebalanced at least annually and exclude management fees and other charges.  Both benchmarks are presented in Canadian Dollars and on a total return basis.

For more information about comparing your portfolio’s return to a benchmark, please contact us.